| By Joel Kruger, DailyFX Technical Strategist
Talking Points
- RBA shocks markets and cuts by 50bps to 3.75%
- Decision surprising given RBA track record
- Aussie sold aggressively across the board in response
- China manufacturing PMIs come in weaker than expected
- Yen continues to find bids; but additional upside limited
Trading in May has kicked off with a bang after the RBA came out and shocked markets by cutting rates 50bps to 3.75% (consensus had called for a 25bp cut). Although there was talk of the need for a 50bp cut from the Australian central bank, many, including ourselves, did not believe that the central bank would move so aggressively given their traditionally more hawkish, and less worried outlook for the local and global economy. The shock was therefore not that rates were cut 50bps, but rather that a central bank which has stubbornly erred on the hawkish side throughout the global turmoil, finally relented and woke up to reality. Better late than never, and we fully support the central bank decision and believe there is a clarity finally presenting that had long been absent. In the accompanying statement, the RBA cited softer economic conditions, housing woes, and a moderation in inflation. We believe that this is a very important decision which will have a wider influence on the market over the coming weeks. The RBA decision reaffirms our core view that we are still not at the end of the global crisis, and only now entering the third and final phase which will intensify in the commodity bloc and emerging market economies. China is at the center of this third phase and ongoing evidence of continued slowdown in the Chinese economy should weigh tremendously on the correlated economies. Australia, the other commodity bloc economies and emerging markets will suffer from this slowdown, and we believe that the best trade going forward is short commodity bloc and EM and long major currencies.
While it is hard to focus on anything else at this point in the day other than the RBA decision, the latest China data should certainly not be ignored, with manufacturing PMIs coming in softer than expected. This further highlights our view, and we suspect that the Australian Dollar still has a good deal of downside ahead, particularly now that interest rate differentials and the negative carry are far less intimidating. Aussie bulls could argue that the rate cut is a positive for risk, as it now makes for a far more accommodative environment which will help to stimulate the economy, but we are not buying into this contention, as we feel the RBA has fallen too far behind the curve and will need to play a game of catch up (perhaps "catch down" is more appropriate). Elsewhere, it will be worth keeping an eye on EUR/USD to see if the market can still push higher to test key barriers by 1.3300. USD/JPY is also back in the FX headlines with the major pair dropping to fresh multi-day lows back below 80.00. From here, it seems like there is still room for deeper setbacks, but we do not anticipate a retest of the record lows from 2011 and would instead recommend looking for opportunities to buy on dips below 79.00. EUR/USD: (This recommendation was issued last week but the entry and stop have been revised. See below.) Although the latest rally has been impressive, we contend the market is still locked within a more well defined medium to longer-term downtrend off of the 2008 record highs, and as such, looking to sell rallies in 2012 is the preferred strategy. The rally has now extended beyond 1.3200 and from here we see scope for additional upside through 1.3300. However, once the 1.3300 level is tested and broken, there is a very compelling technical argument to be made for a bearish resumption. A closer look at the 1.3300 level shows a confluence of resistance which includes the obvious psychological barrier itself, some falling trend-line resistance off of the February 2012 peak, the upper bollinger band, and a very attractive 78.6% fib retrace off of the most recent March-April, 1.34400-1.3000 high-low move. As such, we really like the idea of fading and overshoots beyond 1.3300 and will place our entry accordingly. STRATEGY: SELL AT 1.3320 FOR AN OPEN OBJECTIVE; STOP-LOSS ONLY ON ANY DAILY CLOSE (5PM NY TIME) ABOVE 1.3420. ECONOMIC CALENDAR
--- Written by Joel Kruger, DailyFX Technical Currency Strategist
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. Any opinions, news, research, analyses, prices, or other information contained in this email are provided as general market commentary, and do not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. The content in this email is subject to change at any time without notice, and is provided for the sole purpose of assisting traders to make independent investment decisions. Dailyfx has taken reasonable measures to ensure the accuracy of the information, however, does not guarantee its accuracy, and will not accept liability for any loss or damage which may arise directly or indirectly from the content or your inability to access the content, for any delay in or failure of the transmission or the receipt of any instruction or notifications sent through this email. Please read the full disclosures here. Additionally, Dailyfx takes your privacy seriously. Please click here to read our privacy policy. |  Related Blog Posts |  Subscribe via RSS *Get live updates in your web browser window. | |
