Following this weeks’ weaker than expected consumer price inflation figure (up 1.6% from a year ago) for Australia’s first quarter, nearly every analyst is predicting an interest rate cut from the Reserve Bank of Australia (RBA) at their 1st of May meeting. The main debate seems to centre on whether the rate cut will 25 or 50 basis points.
Paul Keating, Australian Prime Minister (1991-1996) feared that Australia was risking becoming over reliant on exports which would leave living standards vulnerable and volatile. Over recent year’s this fear has abated as the Aussie economy has grown at an average rate of 3% a year over the last decade.
However, the Australian government is applying pressure to the central bank to cut rates that could jeopardize this stable economic growth.
Australian’s have many justified gripes: housing prices are still too high; Chinese demand for resources is creating a two tier economy between mining cities and other; infrastructure is crumbling; high taxes make the country uncompetitive; education needs an overhaul and politics have become too toxic for change to stand a chance.
Yet political pressure to cut interest rate will not solve any of these problems. Instead, it may leave Australia vulnerable to the boom & bust cycles Keating warned of all those years ago.
It also gives us an interesting insight into the true independence of the RBA. Many central banks around the world (The US FED, Bank of England, Bank of Japan and European Central Bank) have all bowed to political pressures and introduced policies to bail out dithering politicians.
Glenn Stevens (Governor of the RBA) has been dogged in his insistence that the RBA remain autonomous and is likely to resent Gillard’s attempt to browbeat them into cutting rates. Over his tenure Steven’s has often been outspoken in his views and may take this opportunity to leave rates on hold in order to maintain RBA independence and his credibility. If this is the case, then the accompanying press statement is likely to be softened in order to appease the politicians and is likely to state the RBA is ready to act if needs be.
Having rallied 12 cents since the middle of February, GBP/AUD has encountered solid resistance in the 1.57 region (December’s high & the 76.4% Fibonacci level of the move from 1.606 to 1.4558).
Whilst the current uptrend is still intact (MACD is still above the zero line – bottom panel), the market has become over stretched and a correction looks likely.
We have seen 3 reversal candles form over the last 3 trading sessions (a shooting star, a long legged doji & a hanging man). These reversal patterns need confirmation as they’re single candle patterns, however the short term relative strength indicator (RSI – top panel) has just generated a sell signal by crossing back below the 75% over-brought line which provides this confirmation.
At present, risk sentiment and interest rate expectations are driving the market. In this environment, stop loss and limit orders are a sensible strategy. GBP/AUD has not traded below the 20 day moving average since the start of March. This currently coincides with the 23.6% Fibonacci level and also with the top of the previous up-channel meaning this support should be solid and underpin the market.
With this in mind, I would recommend placing a stop loss below this level. In terms of limit orders, it depends on how ambitious you would like to be but I would consider 1.565-1.595 as a sensible buying target.
We have seen these kind of moves several times over the last 5 years or so. The market tends to rally very aggressively and then give up most if not all of the gains when risk appetites return to the market. In the short term, sellers of Australian dollars should be nervous as a 0.5% rate cut or particularly dovish comments from the RBA or a deterioration of the situation in Europe could easily move this market further against you. I would consider the placement of a stop loss above the recent highs (1.57) if you have a short term time horizon or are particularly concerned. In terms of a limit order, I would recommend targeting the 20 day moving average as this should be the initial target.
Thank you to the guys at halofinancial who provided this analysis.