To say that AUD/USD has seen better days recently is an understatement. Price was rallying within a tight Channel from Friday to Monday’s, rising steadily on the back of before breaking lower during early US trading session. This decline was also spotted in NZD/USD and other major USD pairs, suggesting that the move was USD inspired, most likely due to increasing QE tapering fears which drove stock prices lower as well. In less than 24 hours, we’ve seen AUD/USD falling from yesterday’s Asia High of 0.923 to 0.912 when we started today’s Asian session. Prices went further lower following the release of the meeting minutes, compounding AUD/USD misery, with prices currently trading around 0.906 which was the swing low back on 15th August. The recent corrective rally has been invalidated, and bears are back in business once again.
Looking at RBA minutes specifically, it is hard to simply label the minutes as outright dovish. Despite saying that AUD is overvalued, a mandatory byline in recent months, RBA actually stated that further rate cuts are possible but “not imminent”. This suggest that we may not be seeing anymore rate cuts in the next few months, and potentially for the rest of 2013. Furthermore, considering that RBA has been acting dovish all year round, the “possible rate cuts” feels more like empty threats rather than a signal of dovish intentions. Traders who were expecting more rate cuts soon were rudely shocked, resulting in price pushing back up towards 0.912 initially. However, the short-term bullishness is no match for the overall bearishness which has been in play since yesterday, suggesting that sentiment behind AUD/USD is extremely bearish once again.
Events around Australia isn’t helping bulls either. Kiwi dollar traded lower sharply around the same time thanks to RBNZ’s Wheeler’s comment, dragging AUD down together with it as there was no mention of rate hike by Wheeler despite his claims that RBNZ needs to be more prudent moving forward. Considering that Swaps are pricing in more than 80 bps in rate hike for the next 12 months, it is reasonable to say that market is hugely disappointed. This disappointment resulted in RBA minutes being re-interpreted in a more dovish light, pushing AUD/USD further lower as traders choose to focus on the future possibility of rate cuts.
From a technical perspective, prices is still trying to break the 0.906 support. Stochastic readings suggest that price is Oversold, but as with all strong trends, counter-trend signals from Stochastic tend not to be reliable and we should not automatically assume that 0.906 will hold just because of this. Nonetheless, a rebound is still possible, and price should push back up above 0.908 and preferably 0.91 round figure to suggest that recovery towards 0.914-0.918 is in play. It is likely that Stoch levels will be above 20.0 when price is above 0.908, and hence would be a good confirmation for the 0.914-918 move. On the bearish front, there is no short-term references for bears, and hence there is an open target for bears should 0.906 is broken. However, with readings being Oversold for an extended period of time, it is possible that we could see some form of small pullback to retest 0.906 once again. If the support turned resistance hold, this would be a confirmation for the breakout and gives bears a higher likelihood of follow-through.
Daily chart favors the bears, with price being rejected by the 0.92 ceiling which happens to be the confluence with Kumo’s Senkou Span A. Stochastic readings is also showing the beginnings of a bearish cycle. If both indicators are correct, we could see prices pushing back towards 2013 lows of 0.885 and potentially lower. Preferably price should rade below the 0.90 – 0.903 tail of 13th July candle to show bearish conviction. It is likely that this move would result in a bearish Kumo twist forward, adding credence to a bearish scenario.
Fundamentally, with Fed taper fears building up, we could see continued USD strength which will drag AUD/USD lower. However, should September FOMC meeting not result in any tapering plans reveal, it is possible that price may rebound higher on USD weakening. That being said, with market now starting to re-pricing in future rate cuts by RBA, coupled by Australia’s weakening fundamentals, it is unlikely that USD volatility will allow AUD/USD to pull a full bullish reversal just on a non-tapering event.
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