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Aussie Rallies After RBA Cuts Key Rate by 25-Basis Points as Expected

Aussie Rallies After RBA Cuts Key Rate by 25-Basis Points as Expected

Christopher Vecchio, CFA, Senior Strategist

THE TAKEAWAY:Reserve Bank of Australia June Rate Decision > 25-bps Rate Cut, as Expected > AUDUSD Bullish

After cutting 50-basis points last month, the combined deterioration of the Asian and European growth pictures has prompted another rate cut by the Reserve Bank of Australia. The RBA only cut rates by 25-bps from 3.75 percent to 3.50 percent, in line with the median forecast provided by Bloomberg News. However, with the Credit Suisse Overnight Index Swaps pricing in a 50/50 chance for a 50-bps cut, a surprise was in the cards and price action certainly did not disappoint.

AUDUSD 1-minute Chart: June 5, 2012

Aussie_Rallies_After_RBA_Cuts_Key_Rate_by_25-Basis_Points_as_Expected_body_Picture_1.png, Aussie Rallies After RBA Cuts Key Rate by 25-Basis Points as Expected

Charts Created using Marketscope – Prepared by Christopher Vecchio

Early price action ahead of the release suggested that only a 25-bps cut was due, with the Australian Dollar rallying across the board but most notably against the Japanese Yen and the US Dollar. However, within minutes ahead of the release, it appeared that a 50-bps cut was leaked, with the AUDUSD trading from 0.9755 to as low as 0.9718 a minute before the decision was announced. Nevertheless, with only 25-bps coming down the pipe, the AUDUSD quickly regained ground and traded up to 0.9791 soon after. At the time this report was written, the AUDUSD had dipped back towards its prerelease levels before rising back to 0.9784.

Governor Glenn Stevens noted many concerns in the RBA’s post-decision release, with a great deal of time spent discussing global financial and growth conditions before touching on developments in the Australian economy. Presented below, without commentary, are the key points from the policy statement:

  • Growth in the world economy picked up in the early months of 2012, having slowed in the second half of 2011.
  • Further moderation in growth in China. Conditions in other parts of Asia have largely recovered from the effects of last year's natural disasters, but the ongoing trend is unclear and could be dampened by slower Chinese growth.
  • The United States continues to grow at a moderate pace.
  • Commodity prices have declined lately, though they are mostly still high. Australia's terms of trade similarly peaked about six months ago, though they remain historically high.

On financial markets:

  • The Board has noted previously that Europe would remain a potential source of adverse shocks. Europe's economic and financial prospects have again been clouded by weakening growth, heightened political uncertainty and concerns about fiscal sustainability and the strength of some banks.
  • Capital markets remain open to corporations and well-rated banks, but spreads have increased.
  • Long-term interest rates faced by highly rated sovereigns, including Australia, have fallen to exceptionally low levels. Share markets have declined.

On Australia:

  • In Australia, available indicators suggest modest growth continued in the first part of 2012, with significant variation across sectors.
  • Overall labour market conditions firmed a little, notwithstanding job shedding in some industries, and the rate of unemployment remains low.
  • Both households and businesses continue to exhibit a degree of precautionary behaviour, which may continue in the near term.

Given this surprise (at least according to the basis swaps), in combination with the poor US labor market reading on Friday that has inevitably stoked QE3 speculation, the AUDUSD may be primed for a run back into former trendline support, coming in at 0.9845/60. Rallies should be capped by 0.9880/0.9900, and a daily close above this zone exposes 0.9930 and parity, 1.0000. Beyond these levels, we see little scope for the AUDUSD to gain further, as we believe that the continued stresses in Asia and Europe will instigate further risk-aversion, and any rallies should be viewed as opportunities to sell.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com

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