AUD/USD – RBA Rate Cut Reaction

The Reserve Bank of Australia cut its policy rate by 25bps in its latest round of decision making today, bringing the cash rate to a record low of 2.75%. RBA Governor Glenn Stevens cited a strong AUD and easing inflation when explaining the decision. According to the accompanying statement, Governor Stevens stated that the rate cut was to encourage sustainable growth in the economy, which is currently “below trend”. The board also noticed that employment figures are lagging the increase in labor force, resulting in slightly higher unemployment rate. Domestic consumption remains robust, while investment levels remain modest. These factors contributed to the decision to slash rates even though previous rate cuts are still working its way into the economy.

There are good things for consumers to be cheerful about after this round of rate cuts. In the past 2 years, banks were reluctant to pass on the lower rates to consumers, but consumers stand to enjoy the full benefits this time round. The National Australia Bank has cut its mortgage rate by 0.25% immediately after the announcement, while Bank of Queensland will be doing so from 24th May. While the rest of the Australian banks remain silent as of writing, tight competition will denote that other banks will be likely to do so soon enough, which is a good result for RBA who has expressed concerns that credit demand remain weak.

Hourly Chart

AUD/USD went down 60 pips after the announcement, breaking 1.022 significant support along the way. Price was already looking bearish earlier due to the failure to push above 1.025, setting the stage for a bearish breakout below 1.022. Stochastic readings were also pointing to a bearish setup with a bear cycle underway during early Asian trading hours. Current readings are still pointing lower with ample space for readings to go lower, suggesting that price may still find lower lows beyond current levels.

Daily Chart

Stochastic readings from the longer-term Daily Chart is similar to the ones of the short-term Hourly Chart. The Stoch line is continuously pointing lower, on the verge of breaking into the Oversold region. Overall, the tone is heavily bearish with a 3 Black Crow candlestick pattern forming with the 1st Crow the result of a rejection from current overhead Kumo. Current sell-off is simply an extension of the bearish sell-off from 1.058 (12th April high), and bears may be able to enjoy free reign until 1.012 is reached (4th Mar swing low).

Strangely, RBA’s overall tone from the statement did not seem to have change much from previous decisions. According to RBA, inflation remains on target (which is set between 2-3%). The only difference between previous statements and now was the fact that RBA “decided to use some of the scope” that was made available with current inflation levels. Other than that, overall outlook remain cautiously optimistic, which suggest that additional rate cuts in 2013 may not be as forthright, especially given the AUD/USD has weakened significantly compared to recent 1.06 highs.

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