AUDUSD – Drops to Twelve Month Low Below Key 0.70 Level

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 finish last week down to a 12 month low 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. The AUDUSD is now eyeing off the 0.70 level to see whether it receives any support from this level, after it was a major support level 12 months ago providing the base for its push higher to 0.80 earlier this year. Given the strong fall over the last few weeks, it is reasonable to expect a rally of some description in the new week, but you cannot question how strong this current fall has been.

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.

If it is to receive some solid support shortly which sees the AUDUSD 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.

RBA Expected to Sit on Rates in Final 2021 Meeting

The Reserve Bank of Australia (RBA) meets for the final time tomorrow and no one expects them to move interest rates. Since their last meeting in November, thanks to lockdowns in ACT, NSW and Victoria, the economy contracted by 1.9% in the September quarter.

Whilst this decline was smaller than expected, it was still the third largest contraction for a quarter in Australia ever. Now that those states are free from lockdowns, retail spending has exploded.
When Australian Treasurer Josh Frydenberg delivers his mid-year budget review on 16th December, he will be upgrading his growth forecast for next year.

Last week the Organisation for Economic Cooperation and Development (OECD) warned that Australia’s central bank may need to increase interest rates sooner and faster than it is currently anticipating, keeping a close eye on rising inflation. Many economists are starting to believe that the RBA may be able to lift rates from the historic low of 0.1% sooner than their current 2024 plan.

RBA Governor Philip Lowe recently reiterated to financial markers that they shouldn’t expect interest rate increases in 2022. He added that current rates are consistent with inflation of 2 – 3%. Lowe stated that the central bank would only increase rates if it saw inflation sustainably in or above the target range.

AMP Capital chief economist Shane Oliver believes interest rates could start moving upwards in late 2022. “The main threat would be if Omicron turns out to be more deadly than Delta with vaccines offering little protection resulting in a return to lengthy lockdowns … resulting in another year of disrupted growth,” Dr Oliver said.

ASX200 – Relying on Support at Key 7200 Level

The ASX200 index struggled around the 7200 level trying to stay above it. 3 stocks from the ASX200 list achieved an all-time high last week. Namely:

• Uniti Group
• National Storage
• Collins Foods

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

• Adbri
• Aurizon Holdings
• Bapcor
• Bendigo and Adelaide Bank
• Costa Group
• Kogan.com
• Magellan Financial Group
• Nearmap
• Pendal Group
• Platinum Asset
• Pointsbet Holdings
• Polynovo
• Regis Resources
• 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 week however, it has enjoyed some much-needed support from the key 7200 level propping it up and keeping it within reach of 7400. 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. Even though it received some support from 7320, it struggled to return to 7400.

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 as the index has dropped lower. 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
• Communication Services
• Energy
• Australian Real Estate Investment Trusts (REIT)
• Consumer Discretionary
• Consumer Staples
• Industrials
• Health Care
• Materials
• 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.