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Australian Dollar and ASX 200 Trends Hinge on RBA, Fed Rate Cuts

Australian Dollar and ASX 200 Trends Hinge on RBA, Fed Rate Cuts

2019-10-17 02:00:00
Ilya Spivak, Sr. Currency Strategist
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Australian Dollar, ASX 200, RBA, Fed – Talking Points:

  • Aussie Dollar down, ASX 200 up on dovish monetary policy lean
  • Technical positioning hints dominant 2019 trends likely to resume
  • AUD/USD sees key support near 0.67, ASX eyes yearly swing high

A dovish turn in global monetary policy has weighed on the Australian Dollar even as it drove the local ASX 200 stock index upward. Looking at the chart below, Australia’s benchmark 10-year bond yield (turquoise line) has fallen since the beginning of the year as slowing global growth and churning political instability inspired interest rate cut bets, particularly on the part of the Federal Reserve (red line).

The Washington-based central bank is a pace-setter for other monetary authorities: its home currency, the US Dollar, enjoys a commanding 88.3 percent share of worldwide monetary transactions. This means that when the Fed lowers the cost of borrowing the Greenback, lending rates are nudged lower overall. The RBA leaned into the effort soon enough as well, launching a rate cut campaign of its own in June.

That stocks (white line) rose while the Aussie (orange line) fell against this backdrop seems sensible enough. An ASX 200 dividend yield in excess of 4 percent makes the return on equity look rather attractive indeed compared to sinking rates on cash – where AUD’s sensitivity to broad-based sentiment trends has further accentuated weakness – as well as baseline government debt.

AUD/USD vs ASX 200 vs Australia 10-year bond yield vs Fed rate cut outlook

AUD/USD, ASX 200 chart created with TradingView

AUD MAY RESUME DROP AS ASX 200 GAINS AFTER DIGESTIVE PAUSE

The move has paused to consolidate in August, but priced-in RBA and Fed policy bets are still firmly dovish and arguing for resumption. Chart positioning appears to agree, hinting that trends prevailing since the start of the year remain intact. AUD/USD is locked in a narrow range above support near the 0.67 figure against its US counterpart, but the dominant downtrend established from December 2018 is firmly in place.

Australian Dollar vs US Dollar price chart - daily

Daily AUD/USD chart created with TradingView

ASX 200 positioning is painting a similar picture. Prices are consolidating within what looks to be a symmetrical Triangle pattern, which in this case implies a lean toward bullish continuation. If the setup is confirmed on a daily close above 6775.60, the door may be opened to challenge the 2019 high at 6875.50. The 38.2% Fibonacci expansion at 6955.70 follows thereafter.

ASX 200 stock index chart - daily

Daily ASX 200 chart created with TradingView

AUD/USD, ASX 200 TRADING RESOURCES

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivakon Twitter

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