Remaining Bearish On Australian Dollar As The RBA Braces For More Financial Turmoil

In keeping interest rates at 3.50%, the Reserve Bank of Australia (RBA) issued a relatively mundane statement on monetary policy on July 3rd. This statement contained many of the same themes from earlier statements, but, as expected, the RBA did not open the door wide open for more rate cuts. Instead, the RBA chose words of caution:

…more recent indicators continue to suggest weakening in Europe and a slower pace of growth in China…Financial markets have initially responded positively to signs of further progress towards longer-term sustainability in European financial affairs, but Europe will remain a potential source of adverse shocks for some time.

In other words, the RBA is looking beyond its borders and preparing for a world much less supportive of Australia's commodity-driven boom. However, its forecast for on-target inflation still compels a hold on further rate cuts.

Also as expected, the RBA reminded us that "the exchange rate…overall remains high." If other central banks continue to ease as the RBA seems to expect - "commodity prices have declined, which is helping to reduce inflation and providing scope for some countries to ease macroeconomic policies" - I must anticipate a response from the RBA of lower rates to tackle an over-inflated currency (NYSEARCA:FXA). For now, I still expect the currency market to slowly but surely do the RBA's heavy-lifting as global growth expectations continue to ratchet downward. I do not expect the Aussie to levitate too much further above parity from the U.S. dollar (QE3 from the Federal Reserve is a constant wildcard), and I expect the Aussie to start weakening again versus the British pound once the market gets past this week's monetary policy decisions from the Bank of England.

The 200-day moving average (DMA) seems as good a point as any for the AussieClick to enlarge

The 200-day moving average (DMA) seems as good a point as any for the Aussie's rally to finally end versus the U.S. dollar

The British pound struggle to maintain support around the 200DMA with the Australian dollarClick to enlarge

The British pound struggle to maintain support around the 200DMA with the Australian dollar

Source: FreeStockCharts.com

The large caveat to my bearish outlook for the Australian dollar is my projection for the second half the year for the U.S. stock market; at some point, the market should experience at least one more large rally. (Even the U.S. Presidential election cycle suggests upward momentum lies ahead). If so, it is hard to imagine such a rally without the Australian dollar following suit: the currency continues to experience strong positive correlations with the S&P 500 (NYSEARCA:SPY). As a result, my net bearish position against the Australian dollar remains hedged with a bullish position versus the U.S. dollar.

Be careful out there!

Disclosure: I am long SDS.

Additional disclosure: In forex, I am net short the Australian dollar.