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Ooh Watcha Say, RBA?

May 18, 2011 10:05 AM ET
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Forex Gump's Blog
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If you recall, the Reserve Bank of Australia (RBA) held its interest rates steady at 4.75% for the fifth month in a row in its most recent monetary policy meeting. But although it decided to sit on its hands earlier this month, it did have hawkish words to share with the markets.RBA gives the global economy a thumbs up

In its monetary policy meeting minutes, the RBA painted a very rosy picture for its economy. It noted growing demand for Australian goods in Asia, led by China's robust growth. Of course, since most of Australia's exports end up Asian countries, this bit of news had exporters grinning from ear to ear.

As for the rest of the world, the RBA believes that the global economy is experiencing above-trend growth. The RBA definitely knows how to look on the bright side of things, there's no question about that!

Domestic conditions ripe for a rate hike?

But it seems its rose-tinted glasses aren't just focused on the international scene. It had an equally bright outlook for its domestic situation.

According to RBA nerds, growth is expected to be above, if not at, trend over the next couple of years, thanks to booming investments and improving business conditions.

As a matter of fact, the RBA is so confident in its economy that it actually expects its 4.9% unemployment rate to continue to decline. Yeah, you read that right. The RBA believes the unemployment rate, which is already at its lowest point in two years, will fall even further!

Also notable was how the RBA expressed concern over inflation. After seeing quarter-on-quarter CPI rise from 0.4% to 1.6% in Q1 2011, it raised its inflation forecast, saying inflation will probably stay in the upper half of its target band over the next two years.

With hawkish comments like that, it's no wonder AUD/USD went from an intraday low of 1.0506 to its 1.0619 closing price yesterday! The question is, will the prospect of another interest rate hike push the Aussie higher up the charts?

Descending Triangle on AUD/USD Daily

If you've read my 3 Reasons Why You Should Short the Aussie, you'll know that there are other factors that are currently weighing the Aussie down. For one, gold prices remain below the key 1,500.00 level after falling from a high above 1,550.00 earlier this month.

Another factor dragging the high-yielding Aussie down is the recent bout of risk aversion in markets. Aside from euro zone debt contagion worries, markets are also focusing on the U.S. economic recovery that's slower than Pip Diddy's reflexes.

Where to now, Aussie?

So which factors do you think will prevail over the next couple of days? If you take a peek at AUD/USD's daily chart, you'll see that a strong support level at the 1.0550 handle and lower highs on the pair form a descending triangle.

But before you short the pair like there's no tomorrow, notice that the 1.0550 support is right next to the 38.2% Fibonacci level, which might signal a continuation of the bullish trend. In case you haven't read the School of Pipsology's lesson on triangles, you should know that they can also break to the upside.

On a coin toss like this, we can never be certain which way the pair will go. Will the pull of the RBA's hawkish outlook overcome the downward push of commodities and risk aversion? All we know is that something's got to give sooner or later. When the time comes, will I see you in the bullish or bearish side?


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