Additional rebound is based on USD

• AUD/USD maintained upward traction and added to Wednesday’s gains.
• The dollar remained on the back foot as the labor market eased further.
• Australia’s trade surplus widened to more than $6.0 billion in July.

The US Dollar (USD) maintained its bearish mood and added to the previous day’s losses, boosting risk-on assets and allowing AUD/USD to bounce back beyond Thursday’s 0.6700 mark.

Despite a sharp decline earlier in the week, the Australian dollar maintained its positive outlook, supported by the key 200-day SMA at 0.6615. This optimistic view, however, has been threatened by the recent strengthening of the USD and continued concerns about China’s economic outlook.

AUD/USD’s daily recovery was supported by a decent recovery in both copper and iron ore prices. For the latter, continued weakness in iron ore prices is likely to limit further gains for the AUD, given their direct correlation to China’s economic activity.

Recent changes in monetary policy have also supported the Australian dollar’s upward momentum. The Reserve Bank of Australia (RBA) recently kept the official cash rate (OCR) at 4.35%, taking a cautious stance amid ongoing inflationary pressures with no immediate signs of easing.

Further confidence in the AUD was driven by a mixed tone in the RBA’s latest minutes, which highlighted debate among members over the cash rate target hike. The minutes highlighted ongoing inflationary pressures and market expectations of potential rate cuts in late 2024.

Still around the RBA, Governor Michelle Bullock maintained the bank’s stance on Wednesday, warning of the dangers of high inflation. She reiterated that if the economy develops as expected, the Board does not foresee being able to cut rates in the near term.

Despite this, RBA cash rate futures still indicate a high probability of around 85% of a 25bps cut by the end of the year.

Overall, the RBA is expected to be the last of the G10 central banks to start cutting rates.

However, with almost full rate cuts from the Federal Reserve (Fed) on the horizon and the RBA likely to maintain a tight policy for an extended period, AUD/USD could see further gains in the latter part of the year .

However, the Aussie dollar’s gains could be capped by the glacial recovery of the Chinese economy. Deflation and insufficient stimulus are hampering China’s post-pandemic recovery. The latest Politburo meeting, while showing support, did not announce significant new stimulus measures, raising concerns about demand in the world’s second largest economy.

Meanwhile, the latest CFTC report for the week ended August 27 showed that speculators remained net short on the AUD, although their positions had halved from the previous week. The AUD has been in net-short territory since Q2 2021, with only a brief fortnight earlier this year.

In terms of economic data, Australia’s trade surplus widened to $6.009 billion in July, with exports up 0.7% month-on-month and imports down 0.8% month-on-month.

AUD/USD Daily Chart

AUD/USD Short-Term Technical Outlook

Further gains are likely to take AUD/USD to its August high of 0.6823 (29 August), then to the December 2023 peak of 0.6871 (28 December) and finally to the key 0.7000 level .

Sellers, on the other hand, may initially drive the pair to the September low of 0.6685 (September 4), which is previously the temporary 55-day SMA of 0.6667 and the key 200-day SMA of 0. 6615.

The four-hour chart shows a gradual resumption of the upward bias. However, the immediate resistance level is the 55-SMA at 0.6766, followed by 0.6823, which comes before 0.6871. On the other hand, the initial support level is 0.6685, followed by the 200-SMA at 0.6643 and then 0.6560. The RSI hovered around 45.