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Will AUD/USD Selling Continue?

Currencies / Austrailia Jul 18, 2016 - 09:27 AM GMT

By: Richard_Cox

Currencies Currency markets have seen some interesting moves over the last few weeks and one of the better trading setups can now be seen in the AUD/USD.  These scenarios have come largely as a result of recent developments within the central bank. 

The Reserve Bank of Australia (RBA) recently announced that it would be willing to take extensive and unorthodox measures to right the economy, if the need arose. The current interest rate is 1.75%. If this turned out to be the case and the RBA opted to decrease the base interest rate to 1%, then options like government bond-buying would be likely considered. Such a measure would likely reduce the value of the Australian Dollar, which is presently trading near 0.76 USD.


Historically Low Rates

In spite of such a low cash rate (or interest rate), the RBA may well consider a rate cut in August 2016. This is because of Australia’s low inflation rate. If the country maintains an inflation rate close to the current 1.3%, then the RBA will have plenty of scope for reducing the interest rate in the next few months.

Another factor that might prompt a rate cut is the job market scenario. Unemployment went up to 5.8% in June, with full-time jobs faring slightly better than part-time work. Growth in unemployment indicates sluggish wage increase. The current wage growth rate is 2.1%. A weak wage growth rate may trigger a rate cut in August.

Brexit Aftermath Continues

After Britain’s exit from the EU last month, RBA Assistant Governor Guy Debelle warned that a liquidity crunch was very likely. This would prompt the RBA to ease its monetary policy and cut the cash rate, maybe to 1.5%. The impact of Brexit on the Australian stock markets has also been significant. On June 24, 2016, a day after Britain’s historic referendum, the S&P/ASX 200 closed 3.17% lower. The loss incurred was close to $56bn. The AUD also depreciated by USD 3.4 to reach USD 73.3.  These are massive moves that have created price trends that still continue.

In other developments, RBA’s Head of Financial Stability, Luci Ellis, stated that there would be little impact on the economy if Australia’s credit rating was downgraded. This was after credit rating agency Moody’s warned that the current economic turmoil might put pressure on the country’s credit rating. At another conference, Dr. Ellis also said that there was great need for an international framework for lending standards.

The RBA’s last meeting was held on July 5, 2016. The minutes of this meeting will be released on July 19, 2016. What the world is eagerly waiting to see is the stand the RBA has taken vis-à-vis domestic policies and cash rate cut. Once this occurs, markets will have key clues needed in order to know whether or not to increase short positions in the AUD/USD.

By Richard Cox

© 2016 Richard Cox - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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