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AUD/USD declines after interest rates cut

Price at time of writing – 0.8987.

My last note on the AUD/USD was in December last year, with the cross-rate then standing at 1.053. Recent weakness in the Australian dollar suggests another look at the Gann-chart is appropriate.

All trading involves risk. Losses can exceed deposits.

I have been critical of the Reserve Bank of Australia's (RBA) monetary policy for much of the past five years, on the basis that its interest rate settings are far too high for the economy to bear. The RBA Board simply didn't appear to understand the global deflationary forces at work then, which are still impacting today. If mistakes of this magnitude were made in the private sector, careers would be cut short. Governor Glenn Stevens remains in the top job, however, despite the now obvious damage suffered by the nation's economy.

The penny has finally dropped, and the RBA has been forced to slash interest rates to a record low this year. The interest rate chart suggests there is one more cut in the pipeline as well, to a support level of 2.5%. Australian dollar has finally softened as a result, although it must be remembered that much of the weakness is a result of the US dollar’s independent strength.

The AUD/USD Gann-theory support previously lay in a band defined as 0.952-0.969, from which the cross-rate twice bounced in 2011 and 2012. In May this year, however, this support was broken, and the Australian dollar subsequently gained downside momentum. This decline is set to continue, with no further support until the 0.83 level, whereupon a 25% fall from the August 2011 high will be complete. This level provides isolated support only, with the next band of strong support defined as 0.792-0.7936. At the centre of this band is the influential G2 line, and AUD is likely to bounce strongly from this target level.

Recommendation: sell AUD/USD. Target 0.793. Stop-losses can be placed on any break back above 0.969.

AUD/USD chart

 

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