AUD/USD – Rallying Back Up After Expected RBA Rate Cut but Long Term Bears Remain

So the highly anticipated RBA rate cut did happen. RBA slashed its policy cash rate by 25 bps to record low of 2.50%. This was already widely expected, with Credit Suisse Overnight Index Swaps standing at less than -100, indicating that market fully expect RBA to cut rate by 0.25%, with a slight likelihood that a 0.50% rate cut may even occur. Unfortunately, RBA only proceeded with a 25 bps cut, and those traders expecting something more were sorely disappointed.

How disappointed? How about disappointed enough to send AUD/USD prices rallying 20 pips higher immediately when the rate cut decision was announced. Price subsequently did pullback after 10 seconds, as confused traders started reading the accompanying statements which provided a surprising less dovish forward guidance. In it RBA stated that it will assess outlook and adjust policy to foster growth (e.g. referring to current rate cut), but ended up saying that inflation target is expected to be met in 2013 and 2014, easing off pressures for further rate cuts in 2013. It was only after the market has finished reading the statement (around 2 minutes following the rate cut), then we saw further bullish buying sending price all the way up to 0.897.  Since then, price has been trading sideways between 0.897 – 0.899, without making any additional headway with 0.90 resistance apparently a bridge too far for bulls.

Hourly Chart

From a technical perspective, the post RBA announcement rally has succeeded to accomplish a bullish Kumo Breakout. There is also a forward bullish Kumo Twist, hinting of more bullish movements to come. However, stochastic disagree with a broad bullish outlook, with readings deep within Overbought region, adding onto the likelihood that price may not be able to break the 0.90 level based on this singular move alone. Looking at price action, we can see further support turned resistances along the way. First up above 0.90 stands 0.905, and then 0.91. Above that we have 0.919 – 0.921 consolidation zone preventing any further advancement. Only when that resistance band is broken, then we could realistically aim for 0.93 and potentially beyond to reverse current bearish bias into a bullish one. If all these sounds daunting, it probably is.

Daily Chart

Daily chart adds further resistances above 0.93 key reversal level. From a pure price action perspective, a break of 0.93 opens up 0.95 as the next bullish objective, but if Ichimoku indicator is of any relevance, a bullish break of current overhead Kumo may be needed before we could see a longer-term bullish reversal coming in play, which will open up 0.97 as the next objective.

Stochastic readings suggest that a break of 0.90 is possible, but looking at how readings seem to behave in the past, it is likely that price will hit the descending trendline or trade within the Kumo but below 0.93 when Overbought region is reached. As such, it is hard to see current move higher beyond anything but as a corrective cycle.

Fundamentally that is not hard to rationalize either. AUD/USD has been so bearish thus far not just due to RBA’s dovishness, but also due to the decline in Australia mining sector which has peaked. The Chinese economy, whose imports have allowed Australia’s economy to run on overdrive during the global financial crisis is also slowing down, pushing Australia deeper into the mud. The numbers simply do not lie – latest Trade balance came in at 602M amidst expectations of 804M, while ANZ Job advertisements continue to fall in the month of June, coming in at -1.1%. The only “good” thing about the economy is that inflation continue to be doing ok. Latest House Price Index (Q/Q) for Q2 stood at 2.4% vs 1.0% expected, while the Y/Y numbers were even more spectacular at 5.1%. Hence RBA should be right in their prediction that inflation target should be met, but that may not be a good thing as the last thing we want is to have high inflation yet weak exports/low job count, a description sounding almost India-like. Fundamentals support a weaker AUD compared to a re-surging US economy’s USD moving forward, and that is beyond short-term over/under expectations of RBA policy rate, which will simply act as volatility within a strong downtrend.

More Links:
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Gold Technicals – Back Below 1,300 with suspected Funds selling

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