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I want to run this as a follow-up post to yesterday’s hung parliament blog and again focus on AUD/USD.
The weekend gap that we spoke about yesterday was duly filled, and the doom and gloom that the hung parliament was supposed to cast over local markets didn’t eventuate.
With vote counting (yes it’s 2016, we don’t work Sundays and we’re doing it manually) still going, and the country no closer to forming even a close to functioning minority government, attention turns to today’s Reserve Bank of Australia rate decision.
We see that all but the one… and there’s always one for reasons you can make your own mind up on… surveyed economists expecting no change when the clock strikes 2.30 pm on the east coast of Australia. Of course the odd man out is looking for a cut and nobody expects a hike.
The RBA most recently cut rates from 2.00% to the 1.75% level we sit at now back in May. This was on the back of the most recent domestic CPI release showing that inflation massively missed expectations and the RBA was forced to move then and there in a shock decision which you can see on the table below:
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Since that cut, the RBA has however dropped the ‘easing bias’ from official statements, including in the minutes of the June meeting which we got to read last Tuesday.
The Australian hung parliament has drawn things out, not to mention the big one being how long it will take for the UK to actually leave the European Union. All this points to the RBA most likely taking a “wait and see” approach today, and communicating a cut in August by returning the easing bias in the accompanying statement.
Early signs have been that financial markets haven’t really missed a beat despite domestic and international issues and I just can’t see a conservative Stevens taking the early jump. Remember, the next CPI data release comes on July 27, a release that the RBA will most likely want to see before pressing the red button.
Turning to the charts, and one possible scenario I’d like to highlight is a continuation of the AUD/USD contrarian play that we spoke about back in May. At the time, this was about getting long at weekly support and playing for some key US data misses which would delay any 2016 interest rate hikes from the Fed.
We got the US data misses, as well as some better than expected local data which gave the Aussie a kick out of the highlighted support level, and price hasn’t looked back since.
But what about the here and now? Coming back to the present and we have Brexit uncertainty all but quashing any 2016 hikes from the Fed and there is even talk that the next move could be a cut! All this does is point to further USD weakness that AUD/USD longs can continue to peg their hats on.
Add this to the RBA reasoning above and we have a case to still be bullish AUD.
Looking for some short term levels to manage our risk around, we have yesterday’s gap and some obvious swing high/lows that stand out. But this is more than likely to be chopped as the reality is that price is sitting in the dead middle of a higher time frame triangle. Higher time frame is king and that weekly chart further up is the one you want to be paying attention to.
All you can do here is plan your trade and trade your plan. Nothing else matters.
On the Calendar Tuesday:
AUD Retail Sales m/m
AUD Trade Balance
AUD Cash Rate
AUD RBA Rate Statement
GBP Services PMI
GBP BOE Gov Carney Speaks
NZD GDT Price Index
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Dane Williams – @VantageFX
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