By The Australian dollar (AUD) and the ASX 200 index will be in the spotlight this week as investors focus on the country’s central bank decision. The AUD/USD exchange rate has jumped to a high of 0.6838, its highest point since December 28 and 7.28% above its lowest point this year.
Similarly, the blue-chip ASX 200 index surged to a record high of A$8,253, bringing the year-to-date gains to over 7%.
RBA interest rate decision
The biggest macro news from Australia this week will be the monetary policy decision by the RBA.
Most economists believe that the bank will have a significantly different tone from the Federal Reserve.
Instead of cutting rates, the RBA will leave interest rates unchanged and hint at delivering a hike later this year or early in 2025 if inflation remains high.
Economic data released last week showed that the country’s labor market is doing well as the unemployment rate remained unchanged at 4.2%. The economy created over 47.5k jobs in August, higher than the expected 26.4k while the participation rate remained at 67.1%.
Australia’s biggest issue is not the labor market but inflation, which has remained stubbornly higher this year. The most recent quarterly inflation data showed that the headline CPI retreated to 3.5%, much higher than the RBA’s target of 2.0%.
Still, most analysts believe that the RBA is bluffing when it threatens to hike interest rates. In fact, the bond market believes that the bank will start cutting rates later this year.
The 10-year yield was trading at 3.95%, down from the year-to-date high of over 4.5%. Similarly, the five-year yield fell to 3.85% from over 5% a few months ago.
Additionally, Australia’s top banks like Westpac, ANZ, and CBA have already started to cut their lending rates in expectation of cuts.
The RBA will not want to be the only central bank that is hiking as others cut. Last week, the Federal Reserve decided to cut rates by 0.50% as it decided to engineer a soft landing. Other central banks like the Bank of England (BoE), Swiss National Bank (SNB), and the European Central Bank (ECB) have all slashed rates this year.
The RBA’s other concern is that a rate hike would hit an economy that is showing signs of slowing down. A key issue is that China, which buys most of Australia’s commodities has stagnated.
Additionally, the prices of most commodities that Australia sells like coal and iron ore has dropped sharply this year.
ASX banks in focus
Several companies in the ASX 200 index will be in focus this week. The most important will be banks like ANZ, CBA, and Westpac, which have surged hard this year. In most periods, banks tend to be the most affected by interest rates because of the net interest margin.
In theory, banks make more money when rates are rising because the margin often increases. Recently, however, there are signs that higher rates have let to capital flight as more Australians switch to the high-yielding money market funds.
The other top ASX company to watch this week will be Rupert Murdoch’s REA Group, which has been working to acquire Rightmove, a UK property listing firm. According to media reports, Rightmove has rejected the offer.
ASX 200 index forecast
Turning to the daily chart, we see that the S&P/ASX 200 index jumped to a record high of A$8,253. This rally happened as other global indices like the S&P 500 and the Nasdaq 100 indices surged to an all-time high.
The ASX 200 index has pulled back and retreated below the key support level at A$8,166, its highest point on August 1. It has remained above all moving averages.
However, there are signs that it has formed a bearish engulfing pattern, pointing to more downside this week. If this happens, it will retest the support at $8,000. In the long term, however, the index will likely rebound and retest the all-time high.
AUD/USD technical analysis
The AUD/USD pair has been in a strong bull run after bottoming at 0.6351 in August. It has jumped by over 7% and is hovering at an important resistance point at about 0.6800.
The pair has risen above the 50-day moving average and is nearing the crucial resistance point at 0.6870, its highest point in December last year. Also, the Stochastic Oscillator has moved to the overbought level.
Therefore, the pair’s outlook is bullish as long as bulls move above the key resistance point at 0.6837, its highest point last week. Such a move will push it to the next point at 0.6870.
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