The RBA Rate Cut Giving the Aussie a Spanking

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The RBA Rate Cut Giving the Aussie a Spanking

The Reserve Bank of Australia (RBA) voted to cut its official cash rate (OCR) from 2.50% to 2.25%. This ends a hold at 2.50% for over year since August 2013.

RBA’s Official Cash Rate:
rba interest rate
(click to enlarge; source: forexfactory.com)

Was this a surprise? Sort of, but not really. Trader’s definitely knew that the RBA was pressured to cut rates especially with all these other central banks doing so (BoC, SNB), or becoming more dovish (BoE, RBNZ), or increasing stimulus measures (ECB).

Other than that, the RBA also provided other reasons: disinflationary pressure and weak domestic demand. It was time to give the economy a jolt with more easy money. While, Glenn Stevens acknowledged that the Aussie has dropped significantly against the USD, it was still above its “fundamental value”.

The Australian Dollar (AUD), understandably got a spanking:

AUD/USD 4H Chart 2/3
audusd 4h chart 2/3
(click to enlarge)

The AUD/USD fell from above 0.78 to around 0.7650 immediately after the rate cut. It is continuing a downtrend that has picked up steam at the turn of the year and into the new year. The FOMC is going into the other direction – a rate hike, so AUD/USD should continue to be pressured. It is now approaching 0.75, which is where Stevens believe the pair ought to be. Perhaps we will get a bit of support there, but for now, watch out for resistance if AUD/USD pulls back to 0.7750.

AUD/NZD had an interesting reaction:

AUD/NZD 4H Chart 2/3
audnzd 4h chart 2/3
(click to enlarge)

In the 4H chart, we can see AUD/NZD rallying from its all-time low at 1.0353 to 1.0795 last week, not an insignificant rise. Then it consolidated a bit ahead of yesterday’s RBA meeting and fell lower, tagging 1.0550 afterwards.

The dip broke below this year’s rising trendline and therefore signals at least a shift from a short-term bullish market into a sideways one. We are not bearish yet as price action showed support at 1.0550, respecting the 200-period SMA. The 4H RSI is also above 40, which represents maintenance of the bullish momentum.

Now, if price can rally back above 1.07, beware of a possible bullish attempt back towards 1.0795-1.08.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.