At 0330 GMT tomorrow (Tuesday 3rd Feb 2015) The Reserve Bank of Australia (RBA) will announce the official Cash Rate at it's first board meeting for the year. Whilst other major central banks have slashed their rates over the previous few years, some even to negative rates, the RBA has maintained the official rate at 2.5% since September 2013.
The Aussie has been in freefall since early September 2014 and has recently managed to find good support around the 0.7700 mark, with resistance around the 0.7825 to 0.7900 level. A review of major brokers shows around 60% of retail traders are currently LONG on the AUDUSD. As such, a solid break below the support at .77 may trigger a wave of stop loss orders.
Adding fuel to the fire, only 6 major economists are predicting a rate cut at tomorrows RBA board meeting, while 21 are betting on rates remaining on hold for the time being. A cut by the RBA tomorrow, earlier than the market expects, is likely to weigh heavily on the AUD. A break below the 0.77 level could see downside targets from 0.75 to as low as 0.71.
Some factors pointing to a RBA rate cut tomorrow:
- Although the latest official figures show Australia's unemployment rate falling, the Reserve Bank's preferred measure (quarter averages) shows it continuing to climb to a current figure of 6.2 per cent
- Since it last met, the annualised pace of growth has slipped from 3.6 per cent to 1.6 per cent in the space of six months
- The bank's previous forecast of rising economic growth published in November is now regarded as out of date and will be revised when new forecasts are issued on Friday.
- Neither consumer nor business confidence has lifted since the Federal Budget
- Inflation provides no impediment to cutting rates. The headline rate is now just 1.7 per cent after the collapse in oil prices. Since the oil price collapse, economic growth has weakened, and the steam has gone out of inflation
- Rapidly falling commodity prices - the fuel in Australia's fire
- Housing demand is starting to taper, despite the historically low interest rate environment
- Australian 10-year yields are trading at record lows
- The China economy continues to weaken (a major Australian trading partner)
Canada has just cut its cash rate to 0.75 per cent. Denmark has just cut its rate to minus 0.5 per cent. The United States is keeping its rate at 0.25 per cent. An Australian cash rate maintained at 2.5 per cent in the face of these moves would give the dollar support the bank would prefer it not to have.
Sources:
http://www.efxnews.com/story/27766/rba-cut-rates-week-sell-audusd-barclays
http://www.marketpulse.com/20150201/audusd-enjoys-support-0-77/
