RBA Up Tonight – AUD/USD To Get Direction?

 | Feb 05, 2013 03:17AM ET

AUDUSD performed its nineteenth nervous reversal on Friday, with a fake break below 1.0380 that was quickly reversed. Time for an RBA cut and a move through the 200-day moving average?

The RBA is up in Asian hours overnight, with a reasonably large minority looking for a rate cut versus those looking for no move. I expect a cut eventually due to some very weak surveys out of Australia, where the economy is underperforming and the hopes for China may be overblown – especially in terms of real evidence on the ground in Australia, which can be considered a satellite of Chinese demand, especially now that the credit bubble days are over Down Under. A weaker than expected inflation figure also suggests increasingly likelihood of a rate cut. If we don’t get a rate cut tonight, we’re very likely to get one at the following meeting. Judging from recent moves at the front end of the yield curve in Australia, however, a rate cut tonight or even a move to suggest more likelihood of a rate cut soon, would be a considerable surprise.

Chart: AUDUSD
Friday saw another failed sell-off attempt for the AUDUSD pair keeps the 1.0340-1.0600 range of the last two and a half months or so intact. Although there has been much discussion of the risk on/risk off trade fading, I still believe that the only salvation for the Aussie as priced in this pair has been the enthusiasm for the carry trade and a general risk on environment. The future from here will be determined by whether the RBA either cuts or signals a cut and whether a new month brings new caution to asset markets or a continued melt-up (watch for those all-time high in Dow Jones industrials headlines in the coming days – we’re very close). To the downside, even if we break below the 1.0345 area low indicated, we’ve still got to work through the 200-day moving average just above 1.0300 to open up for a test of the 1.0150-ish longer term range low stretching all the way back to last summer (!). And the USD will likely need to put up a show of resistance against the Euro as well for a chunky downside move. The upside argument is a bit tough, but if the ECB signals an easier stance (and thus cools the EURAUD rally), risk appetite jumps further from current nosebleed levels, and the RBA signals no interest in changing its policy for now, we may be in for the melt-up scenario. Technically, the danger of the latter notches higher if 1.0500 gives way, but 1.0600 is the real key as it has thrice served as a key range resistance level.