No new revelation during this round of RBA minutes. The Australian Central Bank reverted to type, saying that the effects of previous interest rates have “further to run”, while at the same time asserting that current inflation outlook allows scope for easing if needed. This had been reiterated ad nauseum since the start of the year, and it is no wonder that market interpreted such dross as a sign that RBA may not wish to embark on a rate cut so soon. This view is further anchored when RBA said that its July Policy is “appropriate” with AUD weaker – effectively saying that holding rates is the right thing to do.
The Credit Suisse Overnight Index Swap fell significantly following the minutes release, falling from yesterday -68% high to current 53% probability for a rate cut in August. AUD/USD also jumped higher, pushing above 0.916 and more importantly trading significantly above the 0.911 resistance ceiling.
From a technical basis, this rally following the minutes affirms the break of 0.911 which was the resultant of Prime Minister Rudd’s surprising talk 1 hour earlier, which revolved around the removal of carbon tax. This is a huge boost to the mining industry of Australia, which utilizes heavy machinery in order to mine and transport commodities. Having the carbon tax removed is akin to a 3.8 billion AUD stimulus to the economy, and potentially even more should companies decided to use the cost savings to venture into previously untenable asset purchases/business models due to the high carbon tax. Long-term environmental issues and decrease in Tax Revenue (which Australia is struggling with right now) aside, this move is seen positively by markets which drove AUD/USD higher above 0.911.
Technical traders who simply bought on the 0.911 break would have been rewarded (but lest we forget this is a huge risk considering that there is zero confirmation and the minutes event risk looming then), but even they would need to reconsider keeping their profitable positions with price currently facing the rising Channel Top, coupled with the consolidation ceiling of 0.919 casting bearish shadows. Furthermore, Stochastic readings are deep within Overbought region, and hence it is difficult to imagine price being able to break all the aforementioned resistances on current bullish momentum without seeing some form of pullbacks in the interim.
Daily Chart remains bearish, even though that price has managed to find support via the middle descending trendline. However, it is clear that price action has been consistently pushing for lower lows and lower highs since April, and hence we will need to see price breaking above the top trendline and preferably above 0.94 in order to alleviate current strong bearish pressure.
Fundamentally, it is important to note that today’s minutes does not truly invalidate the case for an August Rate Cut, but rather the minutes wordings only seem to suggest that RBA is not vocal and pressing for more rate cuts. It should also be noted that RBA did not really foreshadow a rate cut in the following month from the minutes, at least where 2013 is concerned with regards to May’s surprise rate cut. Hence it will be premature to automatically assume that a rate cut will not happen, especially since OIS is still pricing in a more than 50% chance that a rate cut is occurring. With regards to the carbon tax removal, it is unlikely that we will see a extreme long term economic impact considering the small quantum involved. Even after accounting for GDP size, BOJ, ECB and FED will certainly scoff at the amount of funds involved, even Greece will find this amount insufficient to bridge the 3 billion EUR gap that it was seeking to appease the IMF last week. This move feels more like a political maneuver by PM Rudd ahead of September elections in order to curry favors with businesses, and hence we should not be surprised should the current positive impact on AUD/USD gets evaporated quickly in the near future.