The FX market is in “risk-on” mode today as the euro rallies and the USD and yen falter, but there was one notable exception – the AUD. The Aussie continues to linger close to the lows of the day, and the lows of the month, after the surprise rate cut from the Reserve Bank of Australia earlier today. Rates were cut by 25 basis points to 3.25%, and it left the door open to further rate cuts down the line. Its chief concern is that the mining sector may peak next year, but crucially the RBA believes the peak could be a bit lower than its original forecasts. This is a big deal – the mining sector has been a major component of Australian growth for the last 10-years, its good public finances are down to its positive terms of trade and that is down to exports from the mining sector. The problem for the RBA is that other sectors of the economy have lagged the mining sector for years, so if it slows the growth outlook for Australia gets considerably worse.
The Aussie was hit hard by the rate cut and the dovish RBA outlook. We tend to think that AUDUSD will remain range-bound for the medium-term between 1.0000 – 1.0600. The bearish crossover in the daily MACD suggests there could be more momentum to come on the downside and the Aussie is at risk of a sell off back towards 1.0180 after falling below 1.0320 key support – a cluster of daily smas. EURAUD was also given a boost after the RBA rate decision. It surged above the 1.2480 – the 200-day sma. Above here suggests a new paradigm for this pair. At the close of the London session EURAUD is on target to close around 1.2575. This daily close may trigger algo buying and other flows into this pair as this is considered a significant break of a major resistance zone, which may herald further gains towards the 1.28 zone.
EURAUD: daily chart
Source: Forex.com
Elsewhere, the economic flow has been fairly light although a story (since denied) that Spain is about to apply for aid helped risk sentiment as that would trigger the ECB’s OMT programme and cause the central bank to act as the lender of last resort (of sorts) for the currency bloc. However, Spanish PM Rajoy said that a petition for aid is not imminent, but this has failed to knock EURUSD out of its stride. The cross is testing 1.2950 – a key short term resistance zone – above which opens the way to 1.30. While we think that a request for aid from Madrid is likely to happen this month, it may not be “imminent” however, it could occur around the 20th of this month when Spain has to pay its largest bond redemption of the year so far. Without an aid request in the bag by then we could see Spanish bond yields start to rise sharply.
Tomorrow has a few juicier economic releases including services PMI data and the first of the labour market reports in the US with the notoriously volatile ADP private sector payrolls report at 1315BST/ 0815 ET.
