AUDUSD has rocketed higher in the first half of the Asia session on the back of stronger than expected Australia economic data and positive investor sentiment. The pair burst through a resistance zone around 0.7600 and is testing another resistance zone around 0.7620 at the time of writing. This comes after a big push towards the US dollar in the North American session derailed the pair.
The Australian dollar was empowered by some encouraging retail sales numbers. Spending jumped 0.7% in February, beating an expected 0.4% increase, and January’s gain was revised higher by 0.1% to 0.5%. While this data isn’t a game-changer for the Australian economy, it’s encouraging to see some life at the ground level. However, the market’s optimism was somewhat tapered by data from ANZ which showed a 1.4% drop in job advertisements last month.
The volatile reaction of the Australian dollar can be explained by thin market conditions and uncertainty surrounding today’s policy meeting at the RBA. At present, the market is pricing in around a 70% chance of a 25 basis point rate cut, at least according to the OIS market. As we explained in our RBA preview, the RBA faces a tough decision with regards to monetary policy. On one hand, the broader economy could use the support of looser monetary policy, but on the other hand a hot property market is limiting the bank’s options. On balance, we think the RBA will lob another 25 basis point off the official cash rate which currently stands at 2.25%, thus our basis is lower for the Australian dollar in the near-term.
If the RBA cuts the OCR today then AUDUSD may head towards its almost six-year low around 0.7530; beyond there we are eyeing 0.7450. Meanwhile, if the bank remains on hold today we expect to see a relief rally in AUDUSD towards 0.7700 or possibly even higher.