Harvest AUD shorts as RBA easing prospects dim

"A gentle turning point has been reached", says RBA Governor Philip Lowe
Chief Investment Office26 Sep 2019
Photo credit: AFP Photo

Chart used with permission from Bloomberg Finance LP, as of 26 September 2019.

The next Reserve Bank of Australia (RBA) policy meeting will be on Tuesday (1 October), but ahead of that, RBA Governor Philip Lowe’s appearance at the Armidale Business Chamber this week (ending 27 September) added colour and provided insights.

The market has certainly pared off a high conviction expectation that the RBA would ease another 25 bps at this meeting (pricing for this move eased from a high 80% to 60%), following his speech. Lowe noted, “after having been through a soft patch, a gentle turning point has been reached”. Subsequently, in the question and answer session, Lowe refused to be drawn into speculating an October rate cut. He responded, “it is not unreasonable to expect more easing”, but “expect us to act consistent(ly) with our mandate”, and one should be surprised “if we don’t do that”.

The moot point is that Lowe had not been explicit ahead of the rate cuts the RBA exacted in June and July’s policy moves where the RBA eased 25 bps, respectively.
Hence, a rate cut looks even keeled in Tuesday’s policy meeting.

Fortunately, the price behaviour has been conformist. In our prior guidance (FX Tactical, 4 September), we expected AUD to edge higher from the freshly minted year’s low of 0.6677, and then sell the bounce into 0.6868-0.6880 as AUD would make another attempt lower. That means AUD will finish off a zig-zag WXY pattern, which is also a five-legged i-ii-iii-iv-v pattern.

AUD has started to make that conformist move with a slippage under 0.6766 – the 61.8% Fibonacci retracement of the September range rally.

The current decline is entering its later stages. Hence, we look to harvest our tactical shorts at 0.6725, around the 78.6% Fibonacci retracement support of the 0.6677-0.6895 band of 0.6723. For now, AUD should struggle ahead of moving-averages resistance at 0.6808.

Naturally, there remains a chance where AUD may re-test the year-to-date lows of 0.6677 with trend support coming in at 0.6688.

But it takes some fresh catalysts to deliver a harsher downside, and with a possible “hawkish” RBA policy meeting ahead, that looks like a stretched move. A move over 0.6833 is a sign that AUD should face short-covering pressures.

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