Australian Dollar Pops as the RBA Leaves Taper Plan in Place. Now What?

The Australian Dollar rallied after the Reserve Bank of Australia updated its latest monetary policy announcement in August. As anticipated, the central bank left the benchmark cash rate target at 0.10 percent. What likely drove investors to buy Aussie Dollars was that the RBA left alone its plan to reduce the amount of weekly asset purchases to A$4 billion in September from the current pace of 5b.

Since July‘s interest rate decision, lockdowns across parts of Australia amid the emerging Delta Covid variant have been denting local growth prospects. This was pushing Australian government bond yields lower as traders priced in a more dovish central bank. There were also rising expectations that the central bank could reverse July’s decision to reduce weekly asset purchases later this year given these developments.

• Sees Australian economic outlook in the coming months as uncertain

• Sees growth at a ‘little over’ 4% in 2022, then around 2.5% over 2023

• Will consider economic, health situation towards the policy outlook

• The economy is still expected to grow strongly again next year

All things considered, the central bank seemed fairly confident about the economic outlook in the long run. Even though there have been lockdowns, the RBA noted that past experience has shown that the ‘economy bounces back quickly’. GDP is expected to decline in the third quarter. Despite some downward revisions to the outlook, the RBA seems confident in proceeding as normal, offering the Aussie Dollar some relief.

The road ahead arguably remains uncertain. China, Australia‘s largest trading partner, placed millions under a strict lockdown amid rising Covid cases. If growth falters in the world’s second-largest economy, then that pain could be felt in Australia. AUD/USD might find some relief if a softer-than-expected US non-farm payrolls report further tempers Fed tapering bets. But, an outsized miss could induce risk aversion.

From a technical standpoint, the broader focus for AUD/USD still seems to be pointed to the downside. A bearish crossover between the 50- and 200-day Simple Moving Averages (SMAs) is hinting towards a downward bias. Keep a close eye on the near-term 20-day SMA. A breakout above this line, with confirmation, may open the door to a push higher in the short run. Otherwise, extending under key support at 0.7290 exposes the 78.6% Fibonacci retracement at 0.7209.