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K. Iukhtenko: trading the RBA rate cuts

 Kira Iukhtenko

The Reserve Bank of Australia (RBA) surprised the market by cutting interest rate by 25 bps to a record low of 2.25% on Tuesday. The Australian regulator is trying to support the economy hit by falling commodity markets – iron ore prices dropped to fresh five-year lows in late-January. Aussie dollar fell sharply on the news. Is it too late to join the AUD/USD bears? Let's overview the current picture. 

What really matters for the market is the change in the RBA’s tone. Throughout the year 2014, the central bank repeatedly stated a period of interest rate stability. The last rate reduction took place in August 2013. It means that the Australian government has become seriously worried about the current global and local economic developments.

According to the accompanying statement, Australian economic growth remains at a "below trend pace" with domestic demand staying low. It also said production growth will remain subdued and sees unemployment peaking "a little higher than earlier expected". The central bank doesn’t pay any visible attention to the recent relatively upbeat economic data: two consecutive months of strong labor market growth, high January manufacturing PMI and adequate CPI growth don’t seem to count.

Missed the announcement? Don't worry: as a tradition, the RBA rate cut doesn’t come alone. Market analysts expect at least one more to follow in H1 2015. There is a high chance of a new rate reduction in March or April. As a result, the medium-term prospects of the Australian dollar turned clearly bearish these days: expectations for a new rate cut will hold the Aussie under pressure for the coming weeks.

On Tuesday AUD/USD broke below the prior $0.7700 support and touched $0.7625. The price is confidently pulling below the 200-month MA ($0.7785). The pair is testing the lower border of the 2-year bearish channel to the downside (around the current levels). Fix below the round $0.7600 figure would confirm the trend sustainability and open the way to our next bearish targets at $0.7165 (78.6% Fibo) and $0.7000 (March 2006 low). You still have a good chance to jump into the bearish train!

Chart. Monthly AUD/USD


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