Aussie Dollar Tumbles on Surprise Rate Cut
Today’s Spotlight Market
With the Reserve Bank of Australia (“RBA”) lowering its benchmark interest rate to a record low 2.75%, we may see more volatility in the value of the “Aussie” Dollar vs. other major currencies, as trading activity has been rather quiet lately because prices have become range-bound.
Traders will not have much down time following the RBA rate cut as they await the release of some key economic data to be released later this week that may significantly affect the currency’s value. Among the key economic reports are Chinese balance of trade figures to be released on Wednesday, as well as Australian employment figures which will be announced on Thursday.
The Reserve Bank of Australia (“RBA”) surprised many currency traders by cutting the policy rate by 25 basis points to a record low 2.75%. In addition to the rate cut, the RBA also gave guidance that it would not be opposed to lowering rates further if conditions warrant. A strong Dollar has hurt the country’s competitiveness in the export market, which has also suffered headwinds from slower growth prospects out of China, who is Australia’s leading trade partner.
Large speculators have used the Australian Dollar as the” long” currency in so called “carry trades”, where traders hope to profit by buying a currency of a country with a higher short-term interest rate and at the same time selling a currency of a country with a lower short-term interest rate, such as the Japanese Yen. By lowering interest rates, and especially by stating an easing bias, the RBA has made this trade less attractive.
This move out of the “Aussie” carry trade is evident in the AUD/JPY currency cross, which weakened by over 100 pips in the hours following the RBA announcement. Currency traders may wish to keep an eye on upcoming Australian economic data, as further weakness in these reports could signal a more aggressive move toward lower rates than the market anticipates.
Looking at the daily continuation chart for Australian Dollar futures, we notice prices have been holding in a narrowing consolidation pattern going all the way back to the second half of 2011. The RBA’s interest rate cut could spur further long liquidation selling, and a test of the lower trendline of this chart pattern should not be discounted.
Prices are now trading below both the 20 and 200-day moving averages (“MA”), and momentum as measured by the 14-day RSI has turned lowe, with a current reading of 42.37. The March 4th “spike” low of 1.0104 is seen as near-term support, with longer-term support currently found near the 0.9900 price level. Near-term resistance is found at the 20-day MA, currently near the 1.0301 price level. Longer-term resistance is seen at the 200-day MA, currently near the 1.0357 area.
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