AUDUSD relief as RBA heeds the call

A punchy rebound for U.S. equities overnight, as the S&P500 posted its largest percentage daily gain since December 2018.

The bounce was aided by prospects of central bank easings, news that G7 finance ministers and central banks will take part in a conference call to plan a response to the economic impact of Covid-19 as well as reports U.S. pharmaceutical companies are making rapid progress towards a vaccine to combat the virus.

Whether the overnight rebound in equities is a short-covering rally or the start of a move to new highs is unclear. Technically my preference is towards the former, however, I’ve learned the hard way fighting central banks is not a profitable past time, it is far easier to go with them.

With that thought in mind, the RBA today played its role in the global monetary response by cutting interest rates by 25bp to an all-time low of just 0.50%. A combination of the devastating bushfires, a run of soft economic data and the threat of Covid-19, forcing the RBA’s hand.

In the last line of the accompanying statement, the RBA expressed a clear easing bias that suggests another 25bp cut in April is likely, taking the cash rate to just 0.25%.

“The Board is prepared to ease monetary policy further to support the Australian economy.”

As we mentioned in yesterday’s article, markets were already fully priced for a 25bp cut and there were some calling for a 50bp cut today, which partly explains why the AUDUSD has posted a modest 30 pip relief rally following the announcement.

Technically there are signs of a 5 wave decline from the .7032 low to last week’s .6433 low and there is evidence of buyers below .6500c as revealed by the shadows sitting below the bodies of Fridays and yesterday’s daily candle. Hence the rally may have room to run a little further yet.

However with the prospects of another rate cut to come in April and keeping in mind RBA Governor Lowe has previously indicated he would strongly consider quantitative easing (QE) once cash rates reached 0.25%, we would expect sellers to emerge on bounces back towards previous lows .6660/80.