AUD USD continues rally at 10 month high but can the recovery last

A recent rebound in risk assets and commodity prices, as well as a weakening of the US dollar and relative stabilization in Asian markets, most notably China, have helped contribute to the AUD/USD rally from multi-year lows that has occurred within the past three months.

This sharp rally has boosted the currency pair from nearly a 7-year low just above 0.6800 in mid-January up to its current position around the 0.7800 level. Within the course of this uptrend, AUD/USD has formed a rough rising channel that has broken out above progressively higher resistance levels, including the most recent breakout above 0.7700. That breakout occurred early this week and has since followed-through as the US dollar has continued to stagnate and commodities have remained supported.

This week, minutes from the Reserve Bank of Australia’s (RBA) most recent monetary policy meeting were released. In those minutes, members showed concern for low wage growth in Australia, along with consistently low inflation. These factors, combined with the noted strengthening of the Australian dollar in recent months, could leave the door open for an interest rate cut by the central bank. The RBA next meets early next month, less than two weeks from now, to set the cash rate and provide a public rate statement. Although the central bank is not widely expected to change interest rates then, any further dovish leanings should be reflected by pressure on the Australian dollar.

As noted, the past three months have seen AUD/USD stage a sharp recovery. Most recently, this has resulted in a new 10-month high above 0.7800 on Wednesday after having broken out above the 0.7700 resistance level early this week. Having done so, however, the currency pair is reaching technically overbought levels. Major resistance factors reside directly above, including both the 0.7900 resistance level as well as the 0.8000 psychological level, which is also around the current position of a major downtrend line that extends back three years to 2013 highs.

With any turn back down from resistance due to a subsequent retreat in commodities and a potential resurgence of the US dollar, a re-break below the noted 0.7700 level could prompt a AUD/USD drop towards significantly lower levels. In this event, potential downside support targets are clearly defined at 0.7500 and 0.7350, followed by the key 0.7000 psychological level.