Aussie is vulnerable | US dollar strength might be key to any fall in AUDUSD

Last night in GMT terms the Reserve Bank of Australia (RBA) announced that it was leaving its core interest rate unchanged, at 2.5%. This was in line with expectations.

However, it is far from plain sailing for the Australian economy at present. While the authorities foresaw a decline in the contribution of the mining industry to the wealth of the nation, and declared its intention to move to a reliance on domestic consumption to compensate, it is still a factor and the rapid and sustained collapse in the price of Iron Ore cannot be adding to the health of Australian GDP.

Unemployment has risen to its highest level in 12 years and the central bank has downgraded its forecasts for both growth and inflation. In the meantime it has repeatedly declared that the strong Australian currency is a drag on the economy.

The authorities do not seem to be able to make up their minds on house prices. Is home construction going to give the economy a boost or have relatively low interest rates created an incipient bubble in the residential property market, both in terms of renters and of those householders who make an investment of their homes?

On the Technical Analysis front, as seen in the chart above, the overall trend in the AUDUSD pair is still upward. The 200 Day EMA is rising and has reliably acted as a support to the exchange rate for some time.

Now, however, it is once more threatened with a breach, following last night’s announcement. There are also two other levels of support that must be gone through before we can truly say that we have the beginning of a downtrend.

Tonight in GMT terms sees the release of the latest Australian GDP figures.

US dollar strength might be key to fall in AUDUSD

In the medium to long term, the fate of the quote currency in this Forex cross, the US dollar, is probably the key to the performance of the pair. For some time now there has been a feeling that the RBA is content to allow its counterpart Central Bank in the US, the Federal Reserve, do the job of bringing about a lower Aussie dollar, which it would like in order to assist the economy. In the last few weeks the Greenback has indeed been performing and the upcoming US Non-Farm Payrolls and unemployment rate reports this coming Friday might have some bearing on this situation.

Any indication that there could be a narrowing of the interest rate differential between the US and Australia that comes sooner rather than later will depress this currency pair.