The Australian dollar has been one of the most resilient currencies against the dollar until the first quarter of 2022, mainly thanks to the strong rise in commodity prices and the strong trade relationship with China.
World currencies vs. USD year-to-date
While the situation in Ukraine saw many global currencies deteriorate in favor of the safe-haven greenback, the AUD and the currencies prospered, giving the Reserve Bank of Australia (RBA) greater option in its approach. The chart below highlights the strength of the Australian economy at the current juncture with unemployment at record highs while inflationary pressures are relatively subdued for many of its global counterparts, including the US. The RBA has held the cash rate steady at 0.1% since late 2020, but strong economic data in Australia would certainly allow for further central bank tightening. RBA Governor Philip Lowe has expressed concerns over inflation, but core CPI remains within the-bank target range of 2-3%. Another key metric that could trigger a rate hike could be wage increases, but that figure has yet to cross the 3% mark.
Australian Cash Rate, Core Inflation and Unemployment Data
The divergence between the Federal RReserve and RBA so far give AUD the edge if RBA turns hawkish.HHowever, a relatively subdued market reaction from an aggressive Fed could provide support for USD upside in the near term. The rise in COVID-19 cases in China has prompted strict lockdowns by the Chinese government and could weigh on the AUD’s rise if the situation negatively impacts Chinese growth, commodity prices and Requirement.
On the contrary, the conflict in Ukraine is giving a boost to commodity prices. Australia’s resistance to the current geopolitical situations should continue to support the currency if the war drags onh Q2. This positive relationship between commodity prices and the AUD/USD is illustrated by the Australian Commodity Price Index pictured below:
AUD/USD versus the Australian Commodity Price Index
AUD/USD technical analysis
AUD/USD weekly chart
Chart prepared by Warren Venketas, IG
The long-term weekly chart above may suggest an upward turn if price action deviates from the developing bullish flag chart pattern (blue). Typically, a bull flag represents a bullish continuation and could consider the psychological level of 0.7500 and beyond. I will be looking for a clear weekly candle above flag resistance before considering further upside.
AUD/USD daily chart
Graphic prepared by Warren Venketas, IG
While the longer-term view may lead to later highs, the daily chart has some limiting indications, particularly via the Relative Strength Index (RSI). It is possible for a bearish divergence to occur as the RSI trends lower (black) against the AUD/USD price action. The bulls failed to break decisively above the 0.7500 resistance zone in October 2021, which could repeat itself in the short term. I anticipate a move lower before a secondary rally higher as the commodity currency benefits from its strong economy and surging commodity prices.
Key resistance levels:
Main support levels: