The Australian Dollar Is Sharply Higher As Traders Await The RBA

Originally published by AxiTrader

We'll that was unexpected.

Not the Australian dollar's rally per se, the 4-hour charts suggested a move higher was on the cards. But I didn't think it would get up through the 38.2% and 50% retracement levels of the last fall to 0.7440 in the 0.7495/0.7512 region.

As I wrote yesterday the parameters of the current downtrend around 0.7560 and 0.7380 seemed like a reasonable range for the week.

But I didn't expect such a strong surge to open the week.

What was interesting was how the surge in South Korean exports seemed to change sentiment in Asia yesterday with the focus shifting away from the weaker than expected Chinese PMI's over the weekend. Australia too had some solid data with the release of a very strong manufacturing PMI result for April.

That changed the tone but it seems that the Aussie's rally got a little extra oomph from the solid move higher in the kiwi which closed last Friday at 0.6862 but is now sitting at 0.6912 up 0.72%.

So now the Aussie sits at 0.7526, up about 50 points from around this time yesterday, as we await the RBA's decision on interest rates this afternoon and what the governor says about the economic outlook here and abroad.

My guess is the abroad bit is going to be upbeat. My sense is they acknowledge last month's positive employment gains but still remain cautious about the overall strength of the labour market and underemployment. My bet is they'll also note that inflation is back in the target band - headline - but also note underlying price pressures remain subdued. And that wages growth is still weak.

The governor and his colleagues will no doubt be happy that house prices look like they fell in April and I expect further comment on lending and housing which remain a handbrake to further cuts. And my sense is the wash-up is that rates will be on hold with a communicated neutral bias on monetary policy.

But I believe the risks of a slowdown have increased. And increased materially.

I say that because this is very much a be careful what you wish for kind of environment right now. Australian's might be able to afford high house prices and larger loans because rates are so low but they have done so by stretching themselves to the extreme in the hope of getting rich in the property market.

Already the RBA told us in the recent Financial Stability Review that around 30% of indebted households have no buffer in their income and outgoings. Now the latest release of the long-running survey of 32,000 households conducted by Digital FInanical Analytics suggests there is growing "stress momentum" in Australian households.

Martin North from DFA says as many as one-in-four households may be facing stress. In response to a heated discussion I accidentally started by sharing an article referencing his research North tweeted the following:

Image

The RBA knows this. Which is why I would dearly love them to try for a non-housing boosting stimulus by signalling that the path to a cut is open and that it, along with the Council of Financial Regulators, will rein in debt and house price growth.

That will knock the Aussie dollar lower if it happens as it will reinforce a notion held in many quarters that the RBA is probably the only major central bank - apart from Sweden's Riksbank - who could ease this year.

Which brings me back the chart of the AUD/USD.

Last week's low of 0.7440 has been an important swing point for the Aussie a few times in the past year. That it held again was important and something I should have highlighted more noisily.

So it remains important support.

On the topside the 0.7555/60 region is where the current downtrend lies. A break and hold above there would be a signal that the bulls have it for now. My system is actually long - so we'll see how it goes.

Here's the chart:

Chart

Have a great day's trading.