The Reserve Bank of Australia is preparing to give this year’s first policy verdict. Australian policymakers are expected to maintain the cash rate target unchanged at 2% but will likely deliver a fairly dovish statement in the light of the negative developments in the global macro picture led by a considerable sell-off in the Chinese market.
Although the global rout in commodity prices and the slow-down in global commodity demand weighed on Australian economy over the past years, a cheaper exchange rate helped enhancing exports, acknowledged the RBA and pulled the unemployment rate to two year lows.
On a trade weighted basis, the Aussie lost the two-thirds of gains accumulated from 2008 dip to 2013 peak and is no more considered as damageable overvalued.
Nevertheless, the RBA is facing a global shift toward a softer monetary policy era as the ECB hinted at more action by March, the BoJ unexpectedly stepped in negative territory zone and the conviction on Fed tightening visibly faded through the first month of the year.
To stay in the race and to defend its position, the RBA may have to consider an additional rate action. A quick glance to market implied policy rates, the possibility of a 25 basis point cut within the next six months is already being factored in
The Australian 10-year yield headed down to the lowest in three-months, yet despite the narrowing yield, the rate-differential remains fairly profitable from a carry perspective. Should the RBA fail to curb the carry appetite tomorrow, the Aussie bulls could gather enough power to take over the 0.7150 hurdle, where 100 and 200-day moving averages have been successful to cap last week’s rally.
Quick glance on technicals
Although the iron ore rallied past 4% in Asia, the AUD/USD lacked power to challenge 0.7149/52 zone (100 and 50 day moving averages respectively) pre-RBA. Technically, the AUD/USD is considered in a positive trend above 0.7022 (major 38.2% on Jan 20 –to-date rise), while a break below this level should signal a short-term bearish reversal for a deeper downside correction to 0.6985 (Fib 50%) before 0.6919 (Jan 26 low).
Mid-term critical resistance remains at 0.7380 (Fib 38.2%). Below 0.7380, the mid-term bias remains negative and we see opportunity in selling the rallies.