Pre RBA Aussie Insights

Today’s RBA decision is widely expected to keep rates unchanged at 3.00%. Markets were not convinced with the RBA’s December rate cut as the Aussie rallied following that decision. The RBA explained in December: “While the full effects of earlier measures are yet to be observed, the Board judged at today’s meeting that a further easing in the stance of monetary policy was appropriate now.”

Indeed, the full effect of the aggressive 2012 rate cuts has yet to filter through. We have repeatedly stated the RBA’s 2012 easing (125-bps cuts slashed the rate to 2009 lows of 3.0%) was a crucial factor in weighing on the currency as the central bank expressed preoccupation about excessive currency strength following the ECB/Fed easing decision of Q3-Q4 as well as the IMF’s November decision to include the Aussie in its reserve currency data. Today, AUD/USD stands slightly below the level where it was at the December 4th decision. The RBA is unlikely to carry on easing in order to weaken the AUD/JPY rate, when the bulk of the move is a result of Tokyo’s policy making.

AUD/USD is seen getting a brief knee-jerk bounce following a decision to hold rates unchanged, but upside is likely to run into resistance stemming from political nervousness in Europe — acting as an excuse to rein in recent overheating in risk appetite. These dynamics are likely to translate to mounting resistance near 1.0480s, but the support remains the more immediate source of concern, as 1.0350 support beckons. A break below 1.0350 will likely target the 200-DMA of 1.0310, but a reminder that the RBA is done at 3.0%, will likely lend key support above 1.03.

AUD/JPY is the preferred Aussie pair with structural positive bias, mainly due to entrenched JPY bearishness resulting from Tokyo’s one-sided campaign to target higher inflation and lower JPY. Any downside caused by depending sell-off in global equities is seen calling up the 95.20 and 94.70 as preliminary levels of support for paving the way for the bulls.