AUDUSD - caught short

The RBA cut rates yesterday by 25 basis points which as I showed with the chart of central bank rates is no big deal given the still large pick up available in the Australian yield curve. To this end I was expecting the AUD to drift a little lower, test 1.0380 perhaps get to 1.0350 and then find some support.

Wrong Wrong Wrong - I completely misread the fact that for some reason the market genuinely was pricing in a small element of a larger 50 basis point cut or simply that everyone was thinking like me. Either way after an initial dip the AUD roared higher against the USD as stops were triggered on short positions. After some consolidation back to 1.0430/35 after the initial run into the 1.0450's the AUD peaked just below the recent range high of 1.0489.

There are a couple of things worth noting for the Aussie this morning before we look at the technical set up. The first is that the characterisation of the RBA cut as an emergency move because the last time we saw 3% was at the depths of the GFC is as wrong as my take on market positioning yesterday morning.

Emergency implies that the move is short term, that it will be reversed soon, as was the case in 2009, and that thinks will get back to normal sometime soon. The reality is very different because the reason that the RBA is driving rates down to 3% is that the Australian economy is more like the moribund economies of Europe than many people even here like to admit.

Sure the level of public debt is not to bad by international standards but it is the level of private debt that is the hand brake on Australian growth. That is, Australian households burdened with as much debt as they had before the GFC but with economic prospects diminishing as the globe continues to suffer and as the mining boom that hardly touched your average Australian fades are focussed on paying down debt or saving - its "Austreity Australian Style" and while it is very different to what is occurring in Europe it is as enduring in its economic impacts.

The better economic settings and the China/mining boom have buttressed Australia up until now but as my colleagues at MacroBusiness highlighted with a quote from the Chairman of our biggest retailer Woolworth's the RBA is not getting traction anymore - Ralph Waters said,

“I’m not saying that [the stimulus] was the wrong thing to do or what was the better thing to do. We haven’t had a recession, life hasn’t gotten too bad, so on balance, it’s pretty hard to criticise. But equally, it’s pretty hard to be ­surprised we are going through our dull moment. Australia avoided [a recession] but?you can’t do that forever and ­eventually we all have to have our moment. The difference in our moment is we are paying the debt and interest we tried to run up to avoid this.”

That is it - Austerity Australian style and that is why rates will need to go lower again and again, 2.5% at least as has been my view since January this year when my wife writing as Hera at MacroBusiness made the case for more rate cuts.

But none of this matters to traders at the moment. Having tried for a day and a half to sustainable push down through 1.0380/90 the market got itself too short and the AUD spiked sharply after the "fact" of the RBA cut. Buy rumour sell fact - like wives tales they work because they work.

Aussie Dollar rally

As you can see in thee chart above the AUD is back at the top of its "box" as Nicholas Darvas would say. A break of 1.0489 is required to kick it higher and if we give it room to run to the convergence of the trend lines on the chart then we get an extension to 1.0535.

EURAUD - consolidating

Euro is sharply higher and on its way to the range top at 1.3170 it seems. My trend following systems are long with their stops in place and it is this EUR specific strength that stopped the AUD's rally from pushing EURAUD lower.

Euro Aussie

For the momemtn the EURAUD is still biased higher and its uptrend continues on the back of the Euro break out and the fact that the AUD is in many ways just coat tailing. Watch out for the GDP data today though as a catalyst for trade. I'd go with aa break of either end of Monday's range.

AUDJPY - just waiting to fall

The USD is doing exactly as I have been expecting and is dropping away slightly. this is acting as a handbrake on the AUDJPY's ability to rally particulalry given except for market positioning yesterday the Aussie's move is really just a residual of the overall USD move lower.

Aussie Yen

As you can see in the chart above the AUDJPY has had a fairly robust range for the best part of 7 trading days now and only a break of either side will kick this cross further.

AUDNZD - nowhere man still

Sideways still with a possible down side bias but we would not play unless the two sides of the recent range break - either 1.2752 or 1.2652.

Aussie Kiwi

 Greg McKenna


Catch me on Twitter @gregorymckenna or @FX_Global