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Abstract: The Reserve Bank of Australia (RBA) President Bullock said inflation is a challenge. Due to the improvement of risk appetite and the decline in the yield of U.S. Treasury Securities, the weakening of the USD pushed the AUD up.

Fundamentals

During the New York session on Tuesday, the AUDUSD consolidated its recent gains to a two-and-a-half-month high. Risk appetite and the decline in the yield of U.S. Treasury Securities put some selling pressure on the USD, thus providing support for the AUDUSD. At the same time, the U.S Dollar Index (USDX) fell to 103.18, the lowest level since the end of August.

The minutes of the RBA meeting on November 7, released in the Sydney session, showed that the monetary policy adjustment took a decisive step, and the cash interest rate was raised by 25 basis points to 4.35%. The move reflects that the RBA pays more attention to managing inflationary pressures and is consistent with its long-term goals.

The Committee members' discussion mainly revolved around two options: raising the cash interest rate or maintaining it at the current level. The decision to raise interest rates was influenced by the consensus that it was a "stronger" course of action.

Achieving the inflation target by the end of 2025 has played an important role in the decision-making process. Members acknowledged that the risk of not meeting these targets increased, which indicated the need for rapid policy responses.

The minutes of the meeting also revealed strategic considerations for future scenarios. Postponement of interest rate adjustment is considered that a "larger scale" policy response may be needed in the future, especially in the case of increasing inflationary pressure.

Preventing inflation expectations from rising sharply is another key issue. The goal of the RBA is to avoid any changes in market sentiment that may destabilize the inflation trend. This is particularly important given the Council's emphasis on "low tolerance" for delays in achieving inflation targets.

The Committee members' inflation forecast is expected to raise interest rates once or twice, which further emphasizes the necessity of raising interest rates.

In addition, Michele Bullock, Chairman of the RBA, delivered a speech at the annual forum of the Australian Securities and Investments Commission today, stressing the continuing challenge posed by inflation to the Australian economy. Bullock predicted that inflation will remain a "key challenge" in the next year or two, highlighting the complexity and long-term nature of the problem.

Bullock talked about a common misunderstanding of the current inflation environment. She said: "There is a view that the current inflation is actually completely supply-driven-gasoline prices, rents, energy, etc." However, she clarified that there is another important "demand factor" that leads to inflation, and global central banks are trying to control this factor.

Bullock also talked about global issues and pointed out that "in a fragmented and conflicting world, we will see more potential supply shocks." She explained the dilemma faced by the Federal Reserve in such shocks: Although the typical approach is to examine temporary supply shocks, persistent shocks may lead to deep-rooted inflation expectations. Bullock warned: "If inflation expectations are adjusted, that is a problem."

Technical Analysis

The AUDUSD continued to bounce back from 0.6269 today, rising further to 0.6585. At this point, intraday bias remains on the upside. As there is still room for a rate hike by the RBA, which unlike other major central banks may be one of the last major central banks to cut rates, this has helped the AUDUSD to rise further.

The current momentum suggests that the overall price decline from 0.7156 has been completed after three waves down to 0.6269. A further rebound to the descending channel resistance (currently at 0.6676) is expected next.

On the downside, secondary support below 0.6533 will first neutralize the intraday bias. However, as long as the support of 0.6451 remains intact, the market will tend to sustain the upside.

On a broader cycle basis, we have yet to confirm that the downtrend from 0.8006 (2021 high) is complete. Although the current rebound from 0.6269 may continue to rise, it could just be the third leg of the adjustment pattern from 0.6169 (2022 low). For now, the medium-term bearish sentiment will persist as long as the 0.6894 resistance level is held. It is recommended to buy the dips in the short term.

Trading Recommendations

Trading direction: Long

Entry price: 0.6550

Target price: 0.6700

Stop loss: 0.6450

Deadline: 2023-12-05 23:55:00

Support: 0.6541, 0.6522, 0.6473

Resistance: 0.6590, 0.6616, 0.6676