5 Sep 2013
Behind the latest AUD rally. Can it really last?
FXstreet.com (Barcelona) - The Reserve Bank of Australia left an important message to the market on Tuesday, one that should not be taken for granted, especially judging by the positive performance of the Australia Dollar over the past 48h.
In an wild turn of events in favour of AUD bulls, the last RBA statement omitted the easing line "the inflation outlook could provide some scope to ease policy further" to instead stick with a more neutral "the Board will continue to assess the outlook and adjust policy as needed", which prompted an ongoing thinking that the RBA easing cycle might be over. If we take the swap rate market in Australia as indication, for the first time in years, it is starting to price rate hikes in 12 months!
Where do we stand?
Markets are always in pursue of value-areas from which to capitalize a future scenario, thus the rise in the Australian Dollar represents a more obvious fractured market. On one side, we have the hawks, increasingly eager to listen and recognize that the more neutral stance adopted by the RBA is the final communication that cutting rates is over.
On the other side, there are still the long-committed perma doves, those that still remain adamant to recognize any softening by the RBA from its aggressive approach to reduce rates, somewhat forced to adopt to facilitate a smoother 'rebalancing' of the economy as it transition from the peak in the 'mining-boom' into a more construction/manufacturing/financial services-oriented economy.
An extensive number of dove views are still being shared by banking institutions though, inclined to believe that the latest RBA statement does nothing to alter their dovish calls. One vocal supporter of further cuts is NAB, who notes: "Easing bias is maintained even though some may try and infer they are more neutral than last month", adding " really nothing new for rates or FX markets in the statement." Time will tell whether or not their assumption continues to pay off, as they were one of the very first banks to start calling for rate cuts before the easing cycle had even started.
However, as prove of the more fractured market, Greg McKenna, CEO at GlobalFX, makes references to a solid argument also favouring the Australian Dollar, noting more optimistic prospects of global growth as another motto driving Aussie prices higher.
"With data printing better in the developed world and with China stabilising, the Australian Dollar bears are under pressure as sentiment turns in favour of the Aussie" McKenna said.
McKenna, quoted CBA’s Head of Currency Strategy, Richard Grace, today at Business Insider, as saying: "Australia’s two‑year bond yield is back above the RBA cash rate and Australia’s terms of trade have modestly lifted", which in view of McKenna, "is a really important turnaround and summarises what the market seems to be thinking as well."
What is the result of putting together the new equation?
The emergence of fresh momentum buyers, combined with shorts bailing as they start to question their dovish views, has produced a vigorous three days vertical rise, one that sellers will not ignore, yet it doesn't come as new, since a similar frenzy buying of Aussie Dollars was also observed in early August.
That spike surely brings no pleasant memories to those last buyers around 0.92, as they got well burn out, following a double top rejection printed between Aug 12 and 19, which preceded an abrupt rotation back sub-0.89. However, that same double rejection pattern is being seen now again, yet emerging from the bottom. The battle is getting interesting indeed!
Referring back to the OIS pricing, the disrupted dovish view towards the RBA is in the process of adjusting, the question is, will we see the same movie being played out again, with sellers' 100 pips stronghold between 0.9220/0.9330 protected, or will the new perception of the market be truly manifested by a break of the, so far, impregnable sellers-dominant terrain.
While not a game changer, as the mid term trend is still down, the ability by buyers to break above the aforementioned sellers' red line would be a significant technical event, one that will most likely bring into play a new window of opportunities to turn buyers for more ambitious targets, probably starting at 0.94/0.95.
However, the tricky part is that the stakes betting against a long-held dovish RBA stance remain quite high, with the RBA having warned that the last thing they need is an expensive currency. They are ready to utilize further rate cuts as ammunition to combat any market excitement towards the $A, which ironically makes a rate cut all more probable the higher the $A gets.
So, if only judging by the currency valuation, where might the RBA draw a line in the sand before cutting rates again? Well, since the RBA has been able to run the country 22-yr straight without a single recession, one should have little doubt about their abilities to read technicals and what it might mean for the AUD/USD a clean break through 0.93/0.9330. Answer? Open doors wide open for a more constructive bullish environment, something they do not want to see.
The RBA will find it hard to let that happen, and even if it does, it is plausible to think it may not take long until they can justify another cut in order to bring down the value of the Australian Dollar.
As a result, barring any shocker in the future, and assuming the Australian economy is expected to walk in a soft economic path in 2013/2014, it continues to sound quite adventurous, incautious to think that the AUD/USD exchange rate may escape from above the cemented 0.93+ level for now. Bulls, enjoy the ST uptrend while it last, might be a good finishing line.
In an wild turn of events in favour of AUD bulls, the last RBA statement omitted the easing line "the inflation outlook could provide some scope to ease policy further" to instead stick with a more neutral "the Board will continue to assess the outlook and adjust policy as needed", which prompted an ongoing thinking that the RBA easing cycle might be over. If we take the swap rate market in Australia as indication, for the first time in years, it is starting to price rate hikes in 12 months!
Where do we stand?
Markets are always in pursue of value-areas from which to capitalize a future scenario, thus the rise in the Australian Dollar represents a more obvious fractured market. On one side, we have the hawks, increasingly eager to listen and recognize that the more neutral stance adopted by the RBA is the final communication that cutting rates is over.
On the other side, there are still the long-committed perma doves, those that still remain adamant to recognize any softening by the RBA from its aggressive approach to reduce rates, somewhat forced to adopt to facilitate a smoother 'rebalancing' of the economy as it transition from the peak in the 'mining-boom' into a more construction/manufacturing/financial services-oriented economy.
An extensive number of dove views are still being shared by banking institutions though, inclined to believe that the latest RBA statement does nothing to alter their dovish calls. One vocal supporter of further cuts is NAB, who notes: "Easing bias is maintained even though some may try and infer they are more neutral than last month", adding " really nothing new for rates or FX markets in the statement." Time will tell whether or not their assumption continues to pay off, as they were one of the very first banks to start calling for rate cuts before the easing cycle had even started.
However, as prove of the more fractured market, Greg McKenna, CEO at GlobalFX, makes references to a solid argument also favouring the Australian Dollar, noting more optimistic prospects of global growth as another motto driving Aussie prices higher.
"With data printing better in the developed world and with China stabilising, the Australian Dollar bears are under pressure as sentiment turns in favour of the Aussie" McKenna said.
McKenna, quoted CBA’s Head of Currency Strategy, Richard Grace, today at Business Insider, as saying: "Australia’s two‑year bond yield is back above the RBA cash rate and Australia’s terms of trade have modestly lifted", which in view of McKenna, "is a really important turnaround and summarises what the market seems to be thinking as well."
What is the result of putting together the new equation?
The emergence of fresh momentum buyers, combined with shorts bailing as they start to question their dovish views, has produced a vigorous three days vertical rise, one that sellers will not ignore, yet it doesn't come as new, since a similar frenzy buying of Aussie Dollars was also observed in early August.
That spike surely brings no pleasant memories to those last buyers around 0.92, as they got well burn out, following a double top rejection printed between Aug 12 and 19, which preceded an abrupt rotation back sub-0.89. However, that same double rejection pattern is being seen now again, yet emerging from the bottom. The battle is getting interesting indeed!
Referring back to the OIS pricing, the disrupted dovish view towards the RBA is in the process of adjusting, the question is, will we see the same movie being played out again, with sellers' 100 pips stronghold between 0.9220/0.9330 protected, or will the new perception of the market be truly manifested by a break of the, so far, impregnable sellers-dominant terrain.
While not a game changer, as the mid term trend is still down, the ability by buyers to break above the aforementioned sellers' red line would be a significant technical event, one that will most likely bring into play a new window of opportunities to turn buyers for more ambitious targets, probably starting at 0.94/0.95.
However, the tricky part is that the stakes betting against a long-held dovish RBA stance remain quite high, with the RBA having warned that the last thing they need is an expensive currency. They are ready to utilize further rate cuts as ammunition to combat any market excitement towards the $A, which ironically makes a rate cut all more probable the higher the $A gets.
So, if only judging by the currency valuation, where might the RBA draw a line in the sand before cutting rates again? Well, since the RBA has been able to run the country 22-yr straight without a single recession, one should have little doubt about their abilities to read technicals and what it might mean for the AUD/USD a clean break through 0.93/0.9330. Answer? Open doors wide open for a more constructive bullish environment, something they do not want to see.
The RBA will find it hard to let that happen, and even if it does, it is plausible to think it may not take long until they can justify another cut in order to bring down the value of the Australian Dollar.
As a result, barring any shocker in the future, and assuming the Australian economy is expected to walk in a soft economic path in 2013/2014, it continues to sound quite adventurous, incautious to think that the AUD/USD exchange rate may escape from above the cemented 0.93+ level for now. Bulls, enjoy the ST uptrend while it last, might be a good finishing line.