Aussie Still Overvalued

Daily Analysis - 19/05/2015

Reserve Bank of Australia Meeting Minutes Show Exchange Rate Remains Problem for Outlook

The latest developments from a fiscal policy perspective and exchange rate view show that the Reserve Bank of Australia’s decision to cut rates was warranted and might necessitate continued accommodation. The Australian Government is racing to cut the budget and find cost savings as the risks to the outlook are increasingly to the downside.

Aussie Dollar Falls on RBA

In its efforts to shore up the Australian economy amid the slump in commodity prices, the Reserve Bank of Australia has focused on reducing the strength in the Australian dollar to remain competitive in international markets. To accomplish this stated goal, the RBA targeted exchange rates by dropping the key interest rate in order to meet the objective of AUDUSD 0.7500. At this point the currency is trading markedly higher after the latest move to cut rates from 2.25% to 2.00% earlier in the month. The Reserve Bank of Australia released minutes from its latest monetary policy meeting overnight, sending the Australian dollar lower after concerns that further rate cuts were inevitable. This comes amid a government budget which is shifting more cost cutting than fiscal stimulus. The Australian dollar has rebounded modestly since dropping, but will likely reflect anticipation of lower rates.

Dollar Reverses Slide

The dollar rebound is sharpening quickly as traders cue up for tomorrow’s FOMC Meeting Minutes which will likely hint towards the future of US interest rate policy. There are some circles that are considering the possibility of a June hike after the especially positive and hawkish commentary from the San Francisco Federal Reserve which believes that first quarter GDP numbers will be revised substantially higher based on seasonal adjustments. This contrasts sharply with the views of economists, almost none of which believe a June increase is coming. In concert with this view is the Atlanta Federal Reserve GDP model which has just seen another revision lower to 2^nd quarter GDP expectations. Estimates are for 0.70% expansion versus Wall Street expectations of 2.70% which are quickly being revised lower. Nevertheless, the dollar rally remains unfazed after several weeks of decline.

Safety Bid Back in Play

The Swiss Franc is benefiting from a renewed bout of risk aversion as Greek fears bleed from sovereign bonds to foreign exchange. The steep decline in the Euro over the last 36 hours has seen EURUSD decline nearly 250 pips while gold prices remain elevated, maintaining the current divergence from dollar strength. The latest drop comes amid an announcement from the ECB’s Coeure that quantitative easing operations for the ECB will be frontloaded for the next two months as liquidity dries up in the summer months. In a sign that the optimism in the Euro might be tempering, the EURCHF continues to selloff, with large offers driving the rate below the Swiss National Bank’s soft exchange-rate target between 1.0500 and 1.1000. This might mean more aggressive monetary policy measures from the Central Bank as they seek to fend off speculators that drive the appreciation in the Franc.

USDRUB Equidistant Channel Technical Pattern

As tensions in Ukraine cool and the Russian economy rebounds from sanctions, the benchmark Russian Stock Index and Ruble have been among the best performing stocks and currencies of 2015. Russia has managed to reverse the flow of funds out of the country and also improve monetary policy while fighting inflation. The Ruble has made strong strides against the dollar, with the USDRUB pair trading in a downward trending equidistant channel since February. The pattern has a bearish bias and the Ruble is forecast to appreciate further after losing substantial value over the past year. Ideal positions are taken at the upper channel line to be closed at the lower channel line. Any movement above the upper channel line could be construed as an upside breakout in the pair to be accompanied by increased volume and momentum.