AUD/USD – Post RBA Rate Hold Rally May Have Legs To Run

Aussie Dollar received a huge boost following the RBA rate announcement, gaining more than 100 pips against the Greenback following the news event. One would have been forgiven to think that RBA actually hiked rates, but in truth the Central Bank kept rates at 2.50% record low, matching broad expectations.

Perhaps the rally is not due to the rate action (or rather inaction), but due to the more bullish sentiment emerging from the accompanying statement. In which, Governor Glenn Stevens said that RBA members sees growth strengthening beyond the short term. More damning for the bears was the fact that Governor Stevens believe that current policy is “appropriately configured” to foster growth. Gone are the dovish phrases such as “stand ready to cut rates if needed” and “additional scope to ease”, suggesting that RBA may not be cutting rates any more in the near future.

Daily Chart

Nonetheless, a shift in tone does not justify such a strong bullish response, and furthermore there is no hint that RBA will be raising rates anytime soon, with the phrase “appropriately configured” most likely alluding to current record low rates. Hence, RBA is merely saying that they will keep current accommodative monetary policy, which is actually rather far from being actively hawkish. Under this light, it is clear that this rally may be over aggressive.

However, before we simply denounce this move as overly aggressive and pack our bags home, it should be noted that there may be other bullish reasons for Aussie Dollar right now. With global risk appetite coming down, Aussie Dollar may be getting back in vogue once more. Previously in 2013 when stocks were flying high, there was very little reason to stick your funds into AUD denominated assets as the 2.5% carry interest is no match for the marauding bullish run in major equity indices. Furthermore there was the lingering threat that RBA will cut rates further, potentially slashing the 2.5% paltry gains even lower before we take into consideration of FX risk. Things are a little bit different now: stock markets are coming down while Treasury yields falling, and given that RBA has a lower chance of slashing rates, it is no surprise that traders will want to put their money into AUD for the next 3 months which gives a much higher yield, or at least high enough to offset any FX risk. In the land of the blind the one-eyed-man is king, and AUD certainly fit the role of “best alternative” if the 2.5% rate is maintained.

Now the key question would be whether this new “safe haven” demand would be able to last the mile. Prima facie, it seems unlikely that we will be able to see such demand pushing AUD/USD much higher as continued risk off appetite will definitely drive conventional “risk currency” such as AUD lower. Also, a main reason why AUD/USD rallied half a decade ago is due to the introduction of Quantitative Easing by the US, which was driving USD lower. With QE actually coming to an end, market could simply decide to hold USD which is a much better safe haven compared to AUD.

On the technical side of things, there could still be some space for bullish momentum to push further. Stochastic readings have yet to enter the Overbought region and prices have since pushed beyond both 0.886 key resistance and the previous swing high of 0.8888. However, traders may still want to err on the side of caution and wait for further confirmation as the previous swing high of 0.8888 showed that a break of 0.886 does not necessarily translate to strong bullish follow-through.

More Links:
GBP/USD – Drops Sharply to Six Week Low Below 1.63
AUD/USD – Rejected Again at Resistance Level of 0.88
EUR/USD – Bounces Well off Support around 1.35

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