RBA cuts rates to 1.75%, May 2016

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The Reserve Bank of Australia cut its key interest rate by 25bps to 1.75% after leaving rates unchanged at 2.0% in over a year. Weak inflation data was cited as a reason behind the RBA’s decision.

The Reserve Bank of Australia lowered its key interest rate from 2.0% to 1.75%; a 25bps rate cut marking a historic low in the RBA’s history. Today’s rate cut marks the first since May last year when interest rates were cut to 2.0%. The RBA’s decision today was finely divided with the ASX showing a > 50% probability as we mentioned in yesterday’s note. Inflation was the key driver behind today’s rate cut decision. Core inflation, which is closely followed by the Reserve Bank of Australia, fell to 1.50%, marking a low reading below the RBA’s 2% – 3% inflation target bank. Following the rate cut announcement, AUDUSD fell over 1.0% to trade below $0.76 in response to the rate cut.

The RBA’s monetary policy statement noted that weak inflation data was behind the move. RBA Governor, Glenn Stevens said, “While the quarterly data contain some temporary factors, these results, together with ongoing, very subdued growth in labour costs and very low-cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”

Lower interest rates in Australia have seen a pickup in housing prices. However, the RBA along with various regulators have managed to a put a lid on soaring housing prices in Australia. The RBA noted that the potential risks in the housing sector were much less than they were a year ago.

AUDUSD is starting to look bearish in the near term, but the longer-term trend continues to point to an upside continuation. The hidden bearish divergence has been confirmed, and as long as prices don’t break above 10th April higher close of 0.7722, we can expect AUDUSD to decline to 0.734, which marks an initial level of support. However, further declines cannot be ruled with the major support identified near 0.7078 – 0.7017

AUDUSD – Weekly Chart, Hidden Divergence with support at 0.734
AUDUSD – Weekly Chart, Hidden Divergence with support at 0.734

On the daily chart, following the rising wedge breakout and a brief retest back to 0.772 – 0.767, AUDUSD is currently pushing lower forming a bearish engulfing candlestick. Minor support at 0.7504 – 0.75 is identified which could offer a near-term bounce, but a break below this level could push prices lower to 0.734, which was a resistance level that eventually gave way. A retest of this level for support could see another bounce potentially to 0.7459 – 0.75 levels.

AUDUSD – Minor Support at 0.75
AUDUSD – Minor Support at 0.75

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