RBA balancing act

With much of the Asian region out yesterday as part of the Chinese Lunar New Year holiday week, we took the opportunity to run the ruler over two markets, copper and China A shares that fall under the umbrella of the “China complex” of markets. The AUDUSD is another member of the “China complex” whose fortunes are influenced by the growth prospects and the outlook for the Chinese economy.

Just as some initial signs begin to appear that the geo-political headwinds that have buffeted the Chinese economy for almost 12 months are set to ease, there are worrying signs that a more protracted slowdown in the Australian economy is starting to play out. A difficult proposition for the Reserve Bank of Australia, who yesterday afternoon elected to play a very straight bat at its first meeting of 2019, before today joining the chorus of recent U-Turns from other global central banks.

Firstly, a recap from yesterday’s RBA meeting. As expected, the cash rate was left unchanged at 1.50% as was the final paragraph of the attending statement: “Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."

Judging by the sharp bounce in the AUDUSD from .7200c to .7264 immediately after the release of the statement, the market appears to have gone into the meeting short AUDUSD. More than likely punting on the possibility that the RBA would follow in the tracks of the Federal Reserve by shifting to a more dovish bias.

What a difference 24 hours can make as the AUDUSD fell below .7200c after RBA Governor Lowe spoke today at the National Press Club of Australia. While the RBA continue to stick with its upbeat expectations for unemployment to fall and for a gradual increase in inflation, it appears the extended run of soft domestic data has proved too difficult for the central bank to ignore, the latest of which was yesterday’s -0.4% month on month fall in retail sales.

Also noted in the Governor’s speech today was the fallout from the banking Royal Commission which continues to impact credit availability, best described in the following paragraph from today’s speech “Over recent years there has been a needed tightening of credit standards, but the right balance needs to be struck. As lenders have sought to find that balance, we have had some concerns that the pendulum may have swung too far the other way, especially for small business.”

Delivering the more dovish tones that the market had hoped to hear yesterday, RBA Governor Lowe said “Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down. Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.”

Once again, the AUDUSD has respected the long-term downtrend resistance currently sitting at .7260ish as well as the 200-day moving average .7290 area. The move lower today has been a tricky move to trade, and well done anyone who endured the rally yesterday and stayed short. From here, the AUDUSD looks set to retest the January .7076 low and beyond that lies the next target of the pre-flash crash low of .6982. Stops on shorts should be set about the .7260/90 resistance zone mentioned above.

Source Tradingview. The figures stated are as of the 6th of February 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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