Australian Dollar took a big hit today thanks to a combination of dismal economic data and RBA’s dovish guidance. Early Asian session saw the release of June’s Building Approvals numbers. Both Y/Y and M/M figures came in much lesser than expected, coming in at -13% and -6.9% against expectations of 0.0% and +2.0% respectively. Unlike New Zealand which is facing an overheating housing market, Australia obviously does not face the same issue. Market took this new revelation to mean that RBA will have further scope to embark on a further rate cut next Tuesday. Rate cut probability according to CS Overnight Index Swaps jumped slightly to 78% following the news, while AUD/USD pushed lower to 0.916, a good 50 pips lower.
This decline is further exacerbated when RBA Governor Glenn Stevens started his scheduled speech, saying that policy rates could afford to be lower, while market expectations for further drops in AUD is “fair”. It is clear that Stevens would like to see AUD/USD lower, and want to push policy rate lower. The Governor further stated that the prudent RBA of old is no more, saying that rates can be lower than in the past. This is as direct as it gets with regards to forward guidance, falling short of telling the market that “yes, we will cut rate in August”. Market took the cues immediately, sending AUD/USD more than 100 pips lower, almost hitting 0.905.
From a technical perspective, the decline seen today can be interpreted as the bearish rejection of the overhead Kumo. Stochastic reading is also heading sharply lower, giving us a bearish cycle signal despite only touching Overbought region briefly back on 24th July. It is also interesting to see that a shooting star pattern was seen when Stochastic was in the Overbought area. Hence current decline can also be interpreted as the late bearish extension of the Shooting Star bearish signal and stochastic bear cycle that started on 24th July.
With RBA rate cut getting less and less in doubt, the question has now evolved into a “now what?”. When RBA does carry out the broadly expected rate cut, will AUD/USD continue to head lower or will we see a buy the rumor sell the news sort of contrarion reaction? Hearing from Stevens today, it seems that RBA may not be contented with just a 25 bps rate cut. Long-term rate expectations remains lower, and may take multiple cuts to reach there. Furthermore, RBA does want a lower AUD/USD, hence we will be able to see bearish traders more willing to hold onto their short positions rather than taking quick profits when the upcoming round of cuts happen.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.