Finally the Pound Australian Dollar (GBPAUD) exchange rate has rallied which, having been months now since I last wrote that, I am guessing is a welcome relief to witness the Aussie Dollar selling off for a change.
The trigger has not been Europe but China which is Australia’s single biggest export market. Since the last research paper the Chinese Premier downgraded growth in 2012 from 8.0% to 7.5%.
This year the Chinese government is said to be keen on getting the Chinese consumer to pick up the growth shortfall rather than rely so much on large scale infrastructure projects and that could mean a drop in demand on raw materials. Last week, Australian mining company, BHP Billiton’s Chairman saw evidence of a the drop in Chinese demand.
Conversely, and true to form, the Reserve Bank of Australia (RBA) Governor Glen Stevens was relatively bullish about the resilience of the Australian economy and he stated that Aussie interest rates were essentially about right for current economic conditions and the futures market had pushed back any expectations of an interest rate cut. But speaking to our clients in Australia and indeed looking at the domestic data coming out of Australia, such as the housing market and retail sector and if you ignore the booming mining sector, the economy could do with some stimulus in the form of lower interest rates.
Looking at the Pound Australian Dollar (GBPAUD) exchange rate sell off this week you’d think that expectations of an interest rate cut are coming. Although the European issue seems to have calmed down, the question remains as to whether the Chinese can manage a soft landing with measures such as reducing agricultural banks reserve ratio requirements (putting more money back into the economy) against a less ordered hard landing causing ripples around global markets.
The coming week could be important for two reasons – we’ve got the next Chinese Purchasing Managers Index (PMI) reading on Monday which recently has suggested a soft landing isn’t a foregone conclusion; if the reading comes in below 50 then it suggests the Chinese economy is slowing and we’ll see Australian Dollar weaken.
Secondly the RBA will be holding their April interest rate meeting and, whilst no interest rate cut is expected what with the recent Chinese data and yesterday’s dovish comments from Australian Treasury Minister Wayne Swan regarding government spending, there’s still the outside chance of an interest rate cut. I accept that this instance is being priced in to the current exchange rate hence the sell off this week on Pound Australian Dollar (GBPAUD) exchange rate.
So technically we’re into the 5th week of a rally with the Pound Australian (GBPAUD) exchange rate trending beautifully higher and it’s been great to get clients trading again above A$1.50 for the first time in 2012. As I write we’ve just made it to the next Fibonacci level at A$1.5400 and Monday’s Chinese Purchasing Managers Index data (which reflects purchasing managers acquisition of goods and services) and Tuesday’s RBA interest rate announcement will be instrumental in dictating its direction from here on.
Australian Dollar Buyers
If you’re keen on targeting higher levels then I think the next Fibonacci will be overhead resistance – so orders at A$1.54-1.5500 may be a good strategy in the run up to the RBA meeting. A note of caution though – technically the currency pair is reaching overbought levels (Relative Strength Indicators (RSI) on both long and short term are both above 70) and so we may be close to a corrective pullback or reversal from here. Effectively we’ve seen a 10 cent rally without a decent correction so trading a portion of your requirement here would also be a pertinent move. Be careful of a quick retracement and daily market close below A$1.5000 to invalidate the trend.
Australian Dollar Sellers
We’re reaching overbought level on the Relative Strength Indicator (RSI) so we may see a correction down to A$1.5250 and then onto A$1.50 if Chinese data is positive and RBA keep interest rates on hold. If we close this week above A$1.5000 then to me I think we’ll be confirming the break and selling the Pound Australian (GBPAUD) exchange rate below A$1.5000 may not be on the cards again
Thanks to the folks at halofinacial for contributing towards this article