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Australian Rate Cut Creates Buying Opportunity In FXA

July 02, 2014

This week, the Australian central bank (RBA) surprised roughly half of the market analyst community and reduced interest rates to new record lows of 2.75%. Since this was a surprise to half of the surveyed analysts, many traders were forced to reverse their bullish positions and this sent prices back to test the lows for the year at 1.0160 against the US Dollar and measured by the CurrencyShares Australian Dollar Trust (FXA). This downside move was relatively forceful and since this area marks a triple bottom on the longer term charts, it is unsurprising to see the latest bounce back above the 1.02 region.

The decision from the RBA came as a result of the well-documented slowdown in the country's mining boom. These declines have come largely as a result of the declining commodities demand from China and these market changes have brought substantial volatility to the Australian labor market. In the last three months, the Australian economy as shown jobs figures that were upside and downside surprises and created substantial volatility in the currency.

The latest results showed an addition of 50,100 for the month of April, and while this is a substantial figure for such a small economy, it should be remembered that this follows a decline of 36,000 jobs in March. The chart below shows that the national unemployment rate is showing averages in the 5-6% range.

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But with the excessive volatility seen in the headline figures, it is not entirely surprising that the RBA made the latest critical decision to reduce rates by 25 basis points to new all-time lows.

Buying Opportunity Created by the Downside Moves

So while the surprise rate decision sent prices lower, the critical bounce from this year's lows shows that investor sentiment versus the US Dollar, as measured by the PowerShares DB US Dollar Index Bullish (UUP), is likely to improve.

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Note the price activity after the latest jobs data. These recent bounces suggest that a bottom is in place and that the post rate decision surprise that was seen initially has now run its course.

Correlated Assets

As a high-yieding currency, the Australian Dollar shows a high correlation with the major stock indices, particularly in the S&P 500 (SPY) and the S&P ASX 200. With the latest bull run in the S&P, bullish sentiment toward the Australian dollar sees extra support:

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The S&P 500 has made gains for 5 consecutive days, driven largely by strong earnings results and the central bank activity in areas like Europe and Australia. The uptrend prospects are clearly visible in the S&P 500, and with the high correlation with the Australian dollar, investors should start to look for new opportunities to buy FXA and sell UUP.

About the author:

RichardCox
Richard Cox is a university teacher in international trade and finance. Lecture halls of 80 to 120 students. Lessons in macroeconomics and price behavior in equity markets. Investing strategies in these articles are based on technical and fundamental analysis of all the major asset classes (stocks, commodities, currencies).

Trade ideas are generally based on time horizons of one to six months.

Follow me on Twitter: @Richard_A_Cox

Visit RichardCox's Website


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