$AUDUSD close to flat 4 2012. Guessing should hold around here til #RBA rate decision. Bounce on no chg. Eventually restart selling #forex
Sure enough, the Reserve Bank of Australia (RBA) left rates unchanged as expected by consensus, and the Australian dollar bounced in the immediate aftermath. How long this bounce lasts is difficult to tell, given the colliding forces of flight to safety, chase for yield, and the market's apparent assumption that Bernanke's Jackson Hole speech further cleared the runway for imminent additional easing by the Federal Reserve.
As always, I focused on what the RBA said differently from previous statements. However, the most important aspects of this monetary policy announcement are what the RBA did NOT say:
- No indication of any likely change in the direction of near-term monetary policy.
- No mention of any negative impacts of a currency which, in the RBA's opinion, remains "…higher than might have been expected, given the observed decline in export prices and the weaker global outlook."
- No reference to any negative impacts to recent plunges in the price of iron ore despite acknowledging this decline (indirectly): "Some commodity prices of importance to Australia have fallen sharply in recent weeks."
Absent such color, I have to assume that the RBA is inclined to sit on its hands as it waits to see how the rapid rate cuts from 4.75% in November to 3.5% in June work their way through the economy. Already, "…interest rates for borrowers are a little below their medium-term averages."
The RBA also showed no concern regarding the availability of funding for its banks:
Low appetite for risk has seen long-term interest rates faced by highly rated sovereigns, including Australia, remain at exceptionally low levels. Nonetheless, capital markets remain open to corporations and well-rated banks, and Australian banks have had no difficulty accessing funding, including on an unsecured basis.
Overall, the RBA raised no significant alarms, did not attempt to jawbone its currency down, and did not signal future rate cuts. Thus, I continue to believe that future rate cuts will be primarily conditioned on events unfolding from Europe. It is not even clear to me how further rate cuts can help the Australian economy. Rate cuts will not increase Chinese demand for iron ore, and Australian consumers are supposedly already over-indebted. Retails sales plunged in July after the stimulus of a tax rebate (handout) sent retail sales surging for the two months prior. If the prime issue is the high valuation of the currency, it is entirely possible the market will send the Aussie down without additional prompting as continued declines in commodity prices should further weaken the resolve of carry traders and yield chasers.
Going forward, I am marginally bearish on the Australian dollar, but I think the outlook is very different depending on the currency pair.
My bearishness on the euro (FXE) far outweighs my bearishness for the Australian dollar. As I have mentioned earlier, the eurozone's growing recession "demands" a lower currency, and I think the ECB will work to make that happen. If some calamity forces euros out of global markets and back into Europe, then all bets are off of course - the euro could actually strengthen (temporarily) under such a scenario.
The Federal Reserve's desire to support an unresponsive labor market makes the AUD/USD cross a 50/50 bet even as it has recently broken down below critical support. The Australian dollar has also broken down versus the Japanese yen. However, with the USD/JPY cross hovering over the critical 78 level, the AUD/JPY pair is exposed to another yen intervention.
This leaves the British pound (FXB) as one of the more attractive candidates for trading against the Australian dollar. The financial news cycle has placed the UK's economic woes on the backburner for now (the Bank of England does meet later this week however) giving clearer runway to this trade (also see "The British Pound Is Back In Fashion").
As I follow these themes, I am also trying to find the right mix to match my own risk tolerance: short EUR/AUD, long GBP/AUD, long AUD/USD, short AUD/JPY. The ratios and positions will likely change less based on my opinions on the Australian dollar and much more on my assessments of the other currencies. For example, I currently consider EUR/AUD a position with a longer duration than AUD/USD or AUD/JPY. Finally, a very intriguing pattern has developed in the AUD/CAD pair. The Canadian dollar has appreciated quickly over the Australian dollar for all of August, presumably as the Canadian dollar became the commodity currency of choice with rising oil prices starting in July. I will be watching to see whether AUD/CAD stays loosely correlated with the ratio of iron ore and oil prices.
The charts below summarize the recent action in all of the aforementioned currency pairs.
The presumed unwind of the carry trade has caused EUR/AUD to rally sharply. This should end around 200DMA resistance.
GBP/AUD is already well above critical support levels and is a buy on dips
The Australian dollar has broken down against the U.S. dollar. Will the decline end now that its performance is flat year-to-date?
The Australian dollar has broken down against the Japanese yen and looks like it could go a lot lower from here
The Canadian dollar retakes the "commodity currency of choice" baton from the Australian dollar
Be careful out there!
Disclosure: In forex, I am short EUR/AUD, long GBP/AUD, long AUD/USD, short AUD/JPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.