One of the key skills needed in currency trading is pairing a strong currency with a weak currency. This is what really helps in trading to pick a near-term direction. A recent example of this in action has come from the RBA and Fed meeting this week.
The RBA had so far avoided hiking interest rates as the RBA board was uncertain about the extent to which inflation was going to stick. One aspect the RBA board had said it wanted to see was inflation in the wage data. Now the wage price index is still to be released in the middle of May, so the fact that the RBA has acted by hiking rates before that date is a strong message. The RBA is now acting to control inflation and further interest rate hikes are expected. This should support the AUD moving forward.
The Federal Reserve had a very high bar heading into the FOMC event. Markets had already priced in a 50 bps rate hike, two more 50 bps rate hikes at subsequent meetings, the start of QT, and a terminal rate above 2.50%. Furthermore, investors had been buying the USD since the start of the year on a more hawkish Fed acting to control surging US inflation. So, when the Fed met it only did what the market was expected. This is why we saw what we expected coming into the event a ‘buy the rumour, sell the fact’ response. This should result in some USD weakness in the near term.
AUDUSD longs attractive
As long as this outlook remains the AUDUSD pair looks attractive to buyers. Especially with the bond yield spread surging higher. Any falls back towards major support should be considered suitable for longs. The main risk is if there is a big slowdown in Chinese growth. China’s economy is closely linked to Australia’s, so bad news for China weighs on the AUD. However, medium-term, there is plenty of promise for fiscal support and monetary policy support from the PBOC.