Australian Dollar Bearish Outlook

The Australian dollar is having a hard time against the US dollar as the last years have seen the pair moving aggressively lower from values above parity to as low as below 0.70.

The reason for this move was mostly caused by the central bank (Reserve Bank of Australia) cutting the rates and a slowdown in China.

What happens in China is extremely important to the Australian economy as more than thirty percent of its goods are going to China. Therefore, if the Chinese economy is catching a cold, Australia is sneezing and the AUD moves lower.

The RBA cut rates in order to adjust to this new reality and now they are seating at 1.5% after being as high as over 3%.

Next week the central bank is meeting again and while it is not expected to cut rates again, the statement should be closely watched for further hints it will do that in the future.

From a fundamental point of view, the AUDUSD pair is doomed to move lower still as the two central banks, the RBA and Federal Reserve in the United States are moving in different directions, or on diverging paths when it comes to monetary policy.

While RBA is still in an easing cycle and hints to do more, the Fed is talking about hiking rates again this year and this might be the beginning of a tightening cycle. This cannot end well for the Aussie pair so more downside should be expected.

The technical analysis points towards a lower AUDUSD as well, no matter what the time frame is used.

On the bigger picture, the AUDUSD is in a major bearish trend that started with a bearish triangle breaking lower from just above parity.

This consolidation in the last months represents just a simple a-b-c in terms of Elliott waves theory, most likely being a flat pattern that by the time it is completed it should allow the bearish trend mentioned earlier to resume.

Moreover, a close look at the 4h chart or the daily one shows a rising wedge forming and everyone knows this pattern is bearish.

However, the big question is if the pattern is completed. Because the time frame is quite big, it could very well drag on for a few more weeks or months, without being invalidated.

The trigger for it to break lower should come from a fundamental event caused by the two central banks mentioned above. If either the RBA cuts rates again or Fed will hike sooner and faster than the market expects, a new leg lower should follow in the AUDUSD pair.

As for the target do the downside, things should be taken step by step, with 0.7150 being the first level that needs to be broken.

This will confirm both the rising wedge is completed as well as the a-b-c finished as well. Considering the fact that now the pair is trading in the mid 0.75 area, there are some pips until that target, but it should come sooner rather than later.

European Central Bank Meeting

Next Thursday the ECB (European Central Bank) is having its regular meeting and this one should be of particular importance for a number of reasons.

This is the first meeting after the summer holiday. During such periods of time, markets are ranging and nothing really happens from both a technical and a fundamental point of view.

However, once September starts, everything changes and this year seems to be no different: ranges all over the place, markets not even reacting to the Brexit vote, and no matter the news, support and resistance levels are holding on the bigger time frames.

As a central bank, the ECB has the mandate to keep inflation below or close to two percent. It means that it will move on rates and monetary policy in order to reach this target.

Last years saw inflation regularly missing the target and actually even dipping into negative territory as deflation took over the Eurozone. In order to fight that, a central bank is cutting interest rate and ECB did that as well.

Not only that the central bank cut the rates, but in doing that it moved them into the negative territory, surprising many analysts. Moreover, further steps were taken in order to adjust the monetary policy, like engaging into an ongoing quantitative easing program that is scheduled to stretch well into the 2017 and also buying private corporate debt.

Nevertheless, despite all efforts, the two main things destined to happen, a lower Euro and higher inflation, are simply not: euro pairs are being bought on each and every dip and inflation continues to fall.

This week saw the core year on year inflation rate dropping from 0.9% to 0.8% and this cannot be a positive sign for the ECB mandate or for the Euro as a currency.

Already speculation started about how the ECB will react to this drop in inflation and this is why the September meeting is so important.

The central bank has many tools that can still be used, like extended the QE program or making some changes in the capital key requirements. However, it is unlikely to announce something this coming meeting.

The reason for that is that more data is needed to see how the QE program that is running now is influencing lending in the Eurozone.

The idea behind negative rates and easy monetary policy is for commercial banks to lend more to businesses and people in order to earn an interest and not to park the overnight liquidities to the central bank’s vault.

But this is not happening as people tend to save more in a deflationary environment.

Having said that, even though the ECB is unlikely to announce new measures at the September meeting, it will definitely have a dovish tone. Draghi will emphasize the bank is remaining vigilant when it comes to inflation and will stress the readiness to act if conditions will not improve.

As a result, Euro should move lower across the board with the one favored to drop the most being the EURUSD.

We’ll find out if that is true in less than a week from now.