AUDUSD – Bounces Off Support at Twelve Month Low at 0.70

In the last week the AUDUSD has bounced strongly off the key support level and 12 month low at 0.70. However in doing so, it has run into another key level at 0.72 which has reversed roles and is now providing some stiff resistance to the AUDUSD. It will be interesting to see now which levels gives way first, either 0.70 or 0.72 and allows the AUDUSD to move through.

In the last few weeks the AUDUSD has fallen strongly from resistance at the three-month high around 0.7550 back down to a three month low below 0.72, before dropping sharply to the 12 month low just below the key 0.70 level. In doing so it has pushed through multiple key levels of 0.74, 0.73 and most recently 0.72, all of which have provided support and resistance to the currency pair over the last few months. This fall follows several weeks of a strong rally which saw the AUDUSD not only move back up through resistance at 0.73 but continuing higher to the 0.74 level and moving through to the three-month high.

This current medium term down trend is becoming similar to its fall during June/July which saw it drop over 600 pips. As expected the 0.70 level has provided support, after it was a major support level 12 months ago providing the base for its push higher to 0.80 earlier this year. The 0.70 level is also a nice round number as a multiple of 10 cents and prevents the AUDUSD from falling into a completely new range with a ‘6’ in front of the price, something it hasn’t had for 18 months.

Now that the 0.70 level has provided some solid support allowing the AUDUSD to rally higher, there are several aforementioned levels above which are likely to step in and provide resistance which will apply constant downward pressure on price, including the current 0.72 level.

RBA Keeps Rates Steady in Final 2021 Meeting

As everyone expected, the Reserve Bank of Australia (RBA) left the official cash rate at the historic low of 0.1% at last week’s final board meeting for 2021. The RBA will not meet again until February. Since their last meeting in November, thanks to lockdowns in ACT, NSW and Victoria, the economy contracted by 1.9% in the September quarter.

There have been concerns over rising inflation as many are pointing their fingers at the red-hot property market and the need for the central bank to take a more active role in curbing it.

In his monetary statement, RBA Governor Philip Lowe acknowledged the property market, but said other variables such as inflation and employment were forcing the RBA to sit tight. “Housing prices have risen strongly over the past year, although the rate of increase has eased over recent months,” Dr Lowe said.

Governor Lowe addressed the concerns about inflationary pressures across the economy, saying the RBA was committed to keeping interest rates low. “While inflation has picked up, it remains low in underlying terms. Inflation pressures are also less than they are in many other countries, not least because of the only modest wages growth in Australia,” he said.

“The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the board is prepared to be patient.”

Governor Lowe said the Australian economy is recovering from the setback caused by the Delta variant and expects growth to return to its pre-Delta path in the first half of 2022. “The emergence of the Omicron strain is a new source of uncertainty, but it is not expected to derail the recovery,” Dr Lowe said in a statement on Tuesday.

ASX200 – Relying on Support at Key 7200 Level

The ASX200 index has enjoyed some much-needed support around the key 7200 level trying to stay above it. 6 stocks from the ASX200 list achieved an all-time high last week. Namely:

• Charter Hall Group
• Graincorp
• IGO
• James Hardie
• National Storage
• Sonic Healthcare

No stocks achieved an all-time low last week, but the following stocks achieved a 12-month low:

• Bapcor
• Codan
• Kogan.com
• Magellan Financial Group
• Nearmap
• Pendal Group
• Pointsbet Holdings
• Zip Co

Closing out the week two weeks ago, the ASX200 index dropped sharply to its lowest level in seven weeks smashing through any support at 7320 and potentially moving through another key level of 7200. This sharp drop has technically completed the head and shoulders reversal pattern that had been forming over the last few months. The pattern had the head above 7600 in August and the first shoulder at around 7400 and the current shoulder around 7500. This is widely accepted as a medium term trend reversal pattern.

In the last two weeks however, it has enjoyed some much-needed support from the key 7200 level propping it up and allowing it to rally back to the other key level of 7400, which has provided resistance yet again in the last day or so. It will be interesting to see whether it remains within this range between 7200 and 7400 for the next few weeks. Prior to the sharp drop, the ASX200 index traded right around the key 7400 level for several weeks, whilst receiving some support from it which allowed it to trade to a six week high just shy of 7500.

In early October, the ASX200 enjoyed solid support from the 7200 level where it propped it up for around two weeks and this level has been called upon again and is likely to continue to keep the index supported. With the sharp drop and some increased daily ranges in the last week, the volatility in the ASX200 index (seen in the chart below as the red line) had picked up.

The following is the Australian industry sectors ranked from the best performing sector to the worst, over the last three months:

• Utilities
• Australian Real Estate Investment Trusts (REIT)
• Energy
• Communication Services
• Consumer Staples
• Consumer Discretionary
• Materials
• Industrials
• Health Care
• Financials-x-A-REIT
• Financials
• Information Technology

All things considered, the index has moved very strongly over the last 12 months, with recent signs that it could easily return to its recent all time high and threaten to move higher. However the recent sharp drop to a seven week low has placed any of those plans on hold for the time being.