When is a Rate Cut Not Enough?

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When is a Rate Cut Not Enough?
Justin Burkhardt | FXFocus.com

Today the Reserve Bank of Australia (RBA) cut the its rates by a quarter of a percentage point to 3.0 percent, as panic set in that the resources boom is fading quicker than anticipated. Note that rates have not been this low since the aftermath of the global financial crisis.  This strategic move was done in effort to rekindle the demand in some of the country’s weaker sectors in hopes that they would offset the rapid decline in the mining sector.
 
A declining mining sector will weigh in on the country’s trade balance and unemployment rates. Miners have already been forced to lay off thousands of workers as this industry begins to falter. The problem is that the boom is reaching a peak quicker than expected; the other sectors such as housing, retail, manufacturing and tourism continue to struggle so the outlook for Australia is not bright.
 
The risk outlook for global growth “is still seen to the downside, largely as a result of the situation in Europe, though the uncertainty over the course of US fiscal policy is also weighing on sentiment at present,” governor Glenn Stevens said in a statement.

A potential threat to Australia’s recovery is the strength of their home currency, which creates barriers for competition in a global market place. The currency has climbed 8 percent from its yearly low, which was reached back in June…. Just another barrier for them to overcome.
 
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FOREX Insights
The AUD.USD has undergone a fairly significant rally today as the Reserve Bank of Australia shave the cash rate by a quarter of a percent. But the pair ran into a strong level of resistance at $104.83. Since the upward thrust did not make a sustainable break through its resistance levels, I am anticipating that the next move will be bearish.
 
If we look at the daily chart, it’s clear that the AUD.USD has been forming some kind of wedge since late 2011 making lower highs and higher lows. My interpretation of what has taken place with the recent upswing was that it is simply retesting the trend line to the downside, so my goal is to buy on the retest. 
 
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Indicators On Watch

  • AUD Gross Domestic Product (Wednesday)
  • AUD Employment Change (Thursday)
  • AUD Employment Rate (Thursday)
  • AUD Trade Balance (Friday)

 

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Your currency analyst,

Justin Burkhardt

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Disclaimer: I have no positions in any of assets mentioned, but may initiate a (long or short) position in the AUDUSD over the next 72 hours