Just wondering your thoughts on the AUDUSD after RBA cut today.
Charts and Bloomberg articles suggest a rally since the announcemet. I know the market has been pricing this in however, I would not expect a rally like this. The only thing I can think of is;
1) Fully Priced in and profit taking once announced, this coupled with thin liquidity around news time has cretaed a large spike
2)stops or a OB being attacked (I have not had time to mark levels )
3) All the shorting recently has been exhausted
At the end of last week, sensitivity was bearish since the AUD tended to sell off on bearish AUD and China based news, but also on good and bad US data (which was a bit weird). Then on Sunday, there were poor retail sales and it sold off and took out the AUD/USD downside stops from the previous week, then there was some macro exhaustion and short covering.
Even though sensitivity was bearish, selling AUD at fresh lows is not the proper macro model. Sort of like on July 12, when AUD/USD made fresh lows below 0.90, if you shorted those fresh lows, it was a poor reward risk ratio trade. Similar situation to what happened after the weaker retail sales tripped downside stops in AUD. If you shorted the fresh lows, the reward risk ratio is poor as a lot of the macro sellers are exhausted. There is a big difference between considering a short trade at the fresh lows, vs at the range highs of 0.9300 or so
It seems there were some market participants that were positioned for a more aggressive RBA, hoping that they would hint at more rate cuts. But today’s RBA statement may have been construed as moving slightly towards neutral, although still dovish. They used the words “previously noted that the outlook could provide scope”, instead of their standard language of “as currently assessed, may provide some scope for further easing.” So some market participants saw that and covered their short trades.
I am not exactly sure how much the short covering can go based on the slight change in language in the RBA rate statement. I cannot pinpoint a pip value range that the market can move.
There are some macro participants that may want to take profits, because the big AUD depreciation, and a lot of rate cuts are bullish for the economy. In normal circumstances, a currency depreciation of 15% and 200 basis points (2.00%) cuts in the cash rate is A LOT of stimulus. But all that bullish economy stimulus is being met with bearish macro forces from the China slowdown, mining slowdown, a bit of rising bond yields around the world. That is why the RBA said that it would like to see the AUD fall a bit more because it would help to boost the economy and inflation, and combat the slowdown in China and from the mining sector.
I am really not certain which side is going to win. The bulls betting that the RBA is relatively done with rate cuts and all that AUD depreciation and rate cuts are a big stimulus and the economy will recover, or those betting that the China slowdown will continue and the RBA will continue cutting rates. I just don’t have an edge in this battle at this moment in time and at the AUD at this level. Of course the information flow changes every day and it is possible in a few days or a few weeks I see something interesting happening, or the AUD gets mispriced somehow.
After finishing today’s analysis, it seems the big opportunities can be in the S&P, Nikkei, USD/JPY (and other JPY pairs) sell off based off profit taking in the summer low liquidity month, etc, which can potentially turn into some risk aversion. Gold might sell off as well.
If risk aversion does come, it will be interesting to see how the AUD responds. It is possible it can sell off on risk aversion, since it can be a fresh bearish AUD catalyst that didn’t exist over the past few months. Or it is possible that it just chops around since it has already sold off so much and part of the market is caught extremely short and may want to cover. The market positioning is more extreme in the S&P, Nikkei, and USD/JPY (and other JPY pairs) for a sell off, rather than for AUD/USD selling off more.
I hope I helped you!