AUD/USD – Holding Declines after RBA Cuts Inflation Forecast

AUD/USD suffered strong declines yesterday due to a sudden bout of strength from USD, which was exacerbated by USD/JPY breaking the 100.0 sonic barrier – pushing USD even higher and AUD/USD lower. Prices found some support around 1.005 when US stocks started to head lower, lowering USD strength. However 1.01 round number continue to act as resistance against any pullback efforts, with price forming a short-term consolidation zone between 1.0070 – 95.

The RBA Quarterly Report failed to inspire any fresh declines, despite RBA slashing its inflation forecast from 2.5% to 2.25% in 2013, one notch higher than the target’s baseline. It seems that market is interpreting this as the reason why RBA cut rates on Tuesday, rather than using it as an indication that RBA will cut rates further within 2013. Credit Suisse’s Overnight Index Swaps are pricing in a mere 18% chance of a 25bps cut in the next meeting post RBA report, agreeing with what we are seeing in terms of the mute price action.

Hourly Chart

It is interesting to see price not heading lower despite the strong underlying bearish sentiment. Yesterday’s rally towards 1.025 on stronger employment data was quickly eroded during early European hours even before the strong USD/JPY move, underlining the strength of the bears. Hence, one can reasonably expect price to trade sharply lower following a downgrade of inflation and warnings of sluggish GDP from RBA just now. Certainly, the failure to push lower does not mean that bulls are back in play, but rather it reflects the lethargy of bears after a move of 200 pips from peak to trough yesterday.

Weekly Chart

Weekly Chart show extreme bearish prejudice with price being furthest away from the Kumo on the bear side since July 2012. Price is also below all the swing lows since the same period, and Stochastic readings we also pointing lower, suggesting that the bear cycle will continue. Forward Kumo is in the midst of forming a bearish Kumo twist, which add on to the overall bearish outlook.

As previous attempts to break below the Kumo since Jul 2012 all ended with long tails (shadows), there remains the chance that this latest venture may turned out to be a fakeout. In light of this, traders should look out for any continued selling activities next week for a confirmation of the breakout scenario. Parity may provide some interim support, but looking at price action for the past 2 years, it is unlikely that the 1.00 psychological round number will have any long lasting impact on the shape and direction of price curve. 0.96-97 will be the 1st level of bearish target from a long term perspective. Lower targets may require a stronger shift in fundamentals, which may bring us closer to pre 2008 crisis levels economic envirnoment. With US fundamentals strengthening and Australia declining, perhaps that day may not be that far away anymore.

More Links:
GBP/USD – Eases Away from 1.56 and Trades at Two Week Low Around 1.5450
EUR/USD – Touches Two Week Low Near 1.30
USD/CAD – Edges Higher After Strong US Unemployment Claims

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