Poor Commodity Prices Put Pressure on the RBA

With the AUD making some steady gains against the USD over the past few weeks, some may be tempted to predict a long term bullish resurgence for the pair. Whilst it is indeed true that in the short term the Aussie Dollar looks bullish, the recent remarks from RBA Governor Glenn Stevens are worth taking into account.

In the coming week, the Reserve Bank of Australia will be making its important cash rate decision. As a result, much of the market will be moving cautiously ahead of the announcement to avoid being burned by a surprise rate change. Whilst it is expected the cash rate will remain steady at 2.00%, RBA Governor Stevens recently expressed concerns that the strengthening AUD might be “getting ahead of itself.” Therefore, it’s no surprise that some might be wary of a surprise rate cut and subsequent devaluation.

On the technical front, the pair has in fact formed a fairly convincing bullish trend over the past two weeks. The 100 day EMA is taking a strong upwards turn, apparently breaking the recent ranging pattern. Additionally, the ADX oscillator is creeping up which in the coming days could reach the important reading of 50 to confirm the trend. However, it is important to keep watch on the RSI and stochastic oscillators which are signalling the pair has become overbought. As a result, the pair could be making a move back to support before continuing the bullish trend in earnest.

Looking more closely at Stevens’s speech, the RBA Governor made it quite clear he would prefer the AUD to be lower. In his statement last month, Stevens pointed out that the AUD would likely be following the commodities prices despite its recent adjustments. Ostensibly, Stevens appears to be making an attempt at jawboning the pair lower to fit his expectations. Consequently, if hammering the expectations channel fails to bear fruit, and the AUD strengthens further, there could be a potential for a rate cut. With current bullish trends remaining stubbornly in place, there is a real possibility that everyone is caught by surprise in coming cash rate announcements.

Ultimately, the recent surge in buying saw the pair test resistance at the 0.7722 mark before running out of momentum. The strength of the rally did come as a surprise as the HIA new home sales result showed a decrease of 5.3% m/m. However, a reduction in commodity prices of 15.4% worked in concert with the recent US NFPR result to eventually level out the pair. While the Aussie Dollar appears to be behaving for now, any more bullish rallies could force the RBA’s hand. Subsequently, the likelihood of the pair remaining bullish and not attracting intervention efforts from the RBA remains slim.