The Reserve Bank of Australia
(RBA) has decided to leave interest rates on hold but, significantly, it has
abandoned its easing bias. Its latest commentary, released last night (GMT),
made no mention of a need for the currency to be lower. It has signaled that an
historically long period of interest rate stability is about to be extended
further. At 2.5%, in Australia ,
interest rates are now historically very low.
The Aussie dollar has been
falling against the US dollar for some time. There are now compelling reasons
to believe that this situation has changed, or is about to change. The daily
chart, above, shows a breakout from a very short sideways channel, lasting no
longer than nine trading days or so, to the upside. Our sentiment, which has
yet to be confirmed, has now changed from being bearish on this pair to being
bullish.
The USA Institute of Supply
Managers report on business in January, which came out yesterday, indicated
that while economic activity continued to expand, it did not do so in the first
month of 2014 at anything like the same rate as it ended 2013. This was a
disappointment for the markets and had a detrimental effect on the US dollar, as
might be expected. The report did, however, make many references to the severe
weather conditions that have been affecting much of the United States ,
which slowed down manufacturing activity and the delivery of raw materials.
Purchasing managers who
contributed to the report expressed optimism (hope?) that activity would
increase again in the coming months.
From our perspective, if the
severe weather affects manufacturing, it can also be expected to impact the
all-important employment figures, which will be released in the form of the
Non-Farm Payrolls report this coming Friday. Unfortunately, the markets do not
seem to be able to recognise short-term distorting factors, such as severe
weather, and react only to the raw numbers. Perhaps this is inevitable, but it
does mean that traders will need to be careful out there.
The disappointing PMI report
only served to accelerate the decline in equities. The USDJPY pair is a good
barometer of how stocks are performing. Ultimately, we expect this pair to rise,
but it seems there is not much prospect of this until the DOW and the S&P
show signs that their punishment might be coming to an end. Hopefully, the
further the Yen pair falls in the face of the equity correction, the further it
will have to rise when it eventually starts to do so. In the meantime we are
out of this pair.
USDCHF remains in an uptrend
and Cable (GBPUSD) is doing very well for us to the downside.
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