As anticipated, the Reserve Bank of Australia reduce their minimum bank rate to 3%. This rate, previously visited during the financial crisis of 2009, ties the record low of the past 52 years. Most economists had anticipated a 25-basis point reduction. The market seemed relieved once details were known, and promptly mounted a rally in the AUDUSD to 1.0480. (UUP, FXA)
Reserve Bank Governor Glenn Stevens offered his assessment of the world economy:
"Global growth is forecast to be a little below average for a time. Risks to the outlook are still seen to be on the downside, largely as a result of the situation in Europe, though the uncertainty over the course of U.S. fiscal policy is also weighing on sentiment at present. Recent data suggest that the U.S. economy is recording moderate growth and that growth in China has stabilised. Around Asia generally, growth has been dampened by the more moderate Chinese expansion and the weakness in Europe."
Continuing in the media release, Governor Stevens had these curious remarks:
"There are signs of easier conditions starting to have some of the expected effects, though the exchange rate remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook. "
It seems to me that Governor Stevens, concluding with his comments about the exchange rate, is concerned with the negative impact of the high exchange rate, possibly on the manufacturing sector. The next Australian Central Bank Meeting does not occur until February, so markets will not have an immediate concern. But another reduction cannot be ruled out at that time.
In late August, we also thought that the A$ could work lower as the mining boom slowed, the manufacturing sector weakened, the trade balance was quite negative and the Chinese boom had slowed. This did not happen. While impossible to measure, we suspect the A$ has been one of the winners in the least ugly contest. As such, the role of a reserve currency has been expanded for the A$, which has elevated the value.
On Friday, we suggested to look for an opportunity buy the A$ should there be weakness. Against the long A$, we would try to sell the Japanese yen should there be some strength. There has been some minor yen weakness against the USD as worries about the fiscal cliff come into play, but the AUDJPY has remained around 85.70.
Going back to the middle of November, the A$ had a quick 350 pip rally up to 86.40. With the pair clinging to the top Bollinger Band and the RSI topping 70, we were cautious, fearful that the overbought condition would give us a sharp sell-off, and a chance to buy the break.
It has now been seven trading sessions, and there has been no break. Often, however, very strong markets do not give you a corrective break. Selling off toward the middle of the BB Bands may be the closest thing we get to a break.
We note that the open interest in the yen futures keeps building, up 4,430 contracts yesterday. The election is on December 16th. Liberal Democrat Abe is expected to be elected, and is the reason specs are buying. He has vowed to print money at the Bank of Japan until the inflation rate goes to 3%. We are not sure that target is realistic, but this pair has momentum. Looking at the weekly chart, a move to the 88.60/89 level seems possible. We are inclined to be long the AUDJPY at current levels with the appropriate stops.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.