AUD/USD looks to US election for relief

AUD/USD hit by US election-driven USD demand

AUD/USD closed lower last week at 0.6559, a decline of 0.68%, marking its fifth consecutive week of losses. This was also its largest monthly drop since September 2022, falling by 4.81%.

The decline was primarily driven by traders increasing their long positions on US dollar (USD) in anticipation of a Republican win in the upcoming US election. A Republican victory is expected to lead to higher tariffs, inflation, deficits, and yields, strengthening the US dollar at the expense of the Australian dollar (AUD).

Adding to the pressure on the AUD, Australian third quarter (Q3) inflation data showed a significant decline ahead of tomorrow's Reserve Bank of Australia (RBA) board meeting.

Political shifts and currency impact

Over the weekend, the latest US election polls showed that the odds of a Republican sweep have decreased to around 37%, down from 48% two weeks ago. Meanwhile, the likelihood of a Democratic win with a split Congress has increased to about 27%.

This shift has weighed on the US dollar, as traders unwind some of the 'USD Trump Trade' premium. This development has boosted AUD/USD, which is now trading around 0.6615 - 0.6620, an increase of 0.85% from its Saturday close of 0.6559.

A Democratic win could serve as a 'get-out-of-jail-free' card for AUD/USD, potentially pushing it higher toward 0.6850. Conversely, a Republican sweep could drive the pair down to around 0.6350.

RBA board meeting preview

Date: Tuesday, 5 November at 2.30pm AEDT

Australia’s Q3 inflation data last week revealed that headline inflation decreased to 2.8% year-on-year (YoY), down from the previous 3.8%, which falls within the RBA's target range of 2% to 3%.

The decline was largely due to electricity rebates and lower petrol prices. The RBA’s September statement noted that government rebates are considered temporary and are typically discounted in its analysis.

The trimmed mean, seen as a more reliable inflation measure, also decreased to 3.5% from 4%, indicating a possible shift toward an RBA interest rate-cutting cycle. However, the strength of the labour market - adding 267,000 jobs over the last six months - suggests RBA rate cuts may be deferred until early 2025.

As a result, we expect the RBA to keep rates steady at 4.35% tomorrow. Forecast adjustments are likely, with gross domestic product (GDP) growth for the end of 2024 possibly revised down to 1.5% from 1.7%, and headline and trimmed-mean inflation forecasts also decreasing to 2.8% and 3.4% YoY, respectively.

RBA cash rate chart

AUD/USD technical analysis

AUD/USD has been on a downward trend, rejecting multi-month downtrend resistance around 0.6900 - 0.6910 in late September, stemming from the 0.8007 high of February 2021 and the 1.1081 high from July 2011.

AUD/USD weekly chart

Midway through last week, persistent downward pressure saw AUD/USD hit an 11-week low of 0.6536.

Today's rebound has AUD/USD challenging resistance at the 200-day moving average of 0.6628. A sustained break above this level, along with surpassing horizontal resistance around 0.6700 - 0.6720, would negate downside risks and pave the way for a rally towards 0.6850.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 4 November 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}