The Australian started the week lower as the market players deal with the hawkish comments of the Federal Reserve, and as the Reserve Bank of Australia lost its credibility.

After the bearish movement of AUD/USD during the weekend, investors seemed lost their confidence in the trend of the pair. As of 10:14 UTC AUD/USD opened at 0.75907 extending the loses last Friday at 0.76244.The pair has an intraday high of 0.76026 and intraday low of 0.75820 then closed at 0.76004. AUD/USD found resistance at 0.76457 and support at 0.75866.


Considering the previous movement of the pair, it will likely continue to move downward after a high volatility. The pair is expected to contract (3) as it failed to reach the outerband (2).There's a reasonable chance that the momentum will fade as the price stay away from the outerband (1).In case this trend continues, expect the pair to stay at the red line in these coming sessions.

The Australia and New Zealand Banking Group Limited supported this trend, although it increased the end-year outlook for the Aussie from $0.67 to $0.76. The bank stated “We continue to think that the distribution of risks is to the downside and that this is simply a timing issue for our bearish view, rather than the beginning of a fresh cycle of strength in the Australian dollar."

“This outlook for both the domestic economy and key commodity sectors means any further appreciation in the Australian dollar is likely to be driven by global liquidity and risk appetite factors, rather than anything fundamental,” the bank added.

Is the RBA doing it all wrong?

At the beginning of the month, the Reserve Bank of Australia decided to lower its monetary policy rate by 25 basis points to 1.5 percent. The members expected the GDP growth in Australia's major trading partners to continue to decline in the rest of the year. The RBA noted the strong trade exposures in China and the increase of commodity prices in general as some of its consideration in cutting its cash rates.


Adding to this, the latest CPI subdued inflation pressures, but the RBA expected the inflation to remain low.  Most of the inflation targets of the central banks were missed, but the Fed still kept its doors open for further stimulus and possibly implementing a rate hike next month.

As the inflation remained low, the RBA has been ignoring the bigger picture. The nominal growth rate declined to 2 percent from 7 percent per annum in the years prior to the GFC. Also, the wages meet the recessionary levels and the budget deficit has withheld government spending.

The RBA needs to identify a more rational growth rate target, thus the current inflation target with a nominal GDP target must be changed. Through this, there’s a big chance that the unemployment will decline, the Australian economy will improve and in the long run the budget sheet will be balanced.

A sensible reform from the RBA may trigger a better outlook on the Australian economy, therefore, sooner or later the bank may increase the cash rate. In times of higher interest rate, the value of the currency goes up. If the interest rate goes up, it could catch the attention of the foreign investors and the demand for the domestic currency will surge as well. Probably, this is what the Aussie needs to advance against a basket of currencies.

Outlook for the week

Separately, the market awaits for the release of the wholesale data of Canada later today. The new U.S. home sales report and the private sector activity of the euro zone will be released on Tuesday. On the following day, New Zealand will disclose its trade balance data while Australia will report the completed construction work numbers. Also this week, the U.S. will report the existing sales, weekly oil data and the jobless claims and durable goods orders.

Further, the impact of the speech by Bank of Japan Governor Haruhiko Kuroda and the release of Japan’s inflation data is highly anticipated as well. Together with the prominent economists and central bankers, Janet Yellen is set to deliver her speech at the Jackson Hole annual meeting.

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