With the Russia-Ukraine crisis reaching its tumultuous boil and the commodities cycle boom in focus for 2022, certain commodities currencies like the Australian dollar is being thrown into focus once again.
The AUD/USD recently crushed the 200-daily moving average, extending to some 3% gains over the past week while it looks to pull back on the backdrop of a strong USD and the impending interest rate revisions by the Fed in a few days’ time.
One could argue that any Fed revisions has already been priced in and perhaps what traders should focus on is the RBA announcement in 26 days and the hard and soft commodities and precious metals supply chain crunch from Russia’s export bans and restrictions.
With inflation soaring to new highs in 2022, there are some indications investors should be looking at, to derive telltale signs for the AUD/USD price action in 2022.
In terms of fundamentals, for those new to the AUD/USD, along with the NZD and CAD, they are considered commodities currencies, with net exports largely comprising of raw materials like oil, agriculture and precious metals.
For a bullish Aussie, a surge in raw materials, positive China consumption news, strong Australian economic activity and a comparatively higher rate hike by the RBA are some key moves that will push the Aussie higher.
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Furthermore, long term stimulus moves by the PBOC announcing the transfer of 1 trillion Chinese Yuan to the finance ministry might suggest the strong desire to underpin the economy, thereby potentially providing buffer for steady demand by Chinese businesses towards Australian exports like iron ore in the years ahead (also justifying the sharp correction observed when the SGX Iron Ore Futures and AUD/USD spread narrowed upon correlation divergence observed in early Feb 2022).
On the flip side, any revision by the Fed higher than the purported 50bp interest rates, Chinese debt accumulation to dangerous levels, a flatter yield spread between the Aussie and US government bonds might provide a counterbalance to my narrative thus far.
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Within the short term to medium term, technical indicators might support a strong bullish Aussie still. When we observe the Bloomberg chart above, we can observe a few things.
In addition to the Aussie breaking out of a bullish falling wedge that was forming since end October 2021, the most apparent is strong bullish momentum as observed by the double bottom candlesticks action coupled with a strong upwards trending line from the RSI. The technical structures indicate a strong bullish momentum for the Aussie.
Although the daily MACD is trading higher above the median line, gains towards the 0.7400 levels are being targeted.
I am of the opinion that at least in the first quarter of 2022, we should see the AUD/USD establish the 0.7320 levels as a strong support level, the next resistance levels of 0.7400 could be breached, and we might see a resolute Aussie for further upsides to 0.7556 highs.
Although the RSI is eyeing an overbought condition, MACD oscillators are highlighting a strong positive upside momentum.
Andrew Stuart Lee Evan is a strategist at Phillip Nova
Photo by Maksym Kaharlytskyi on Unsplash
