(This is an excerpt from an article I originally published on Seeking Alpha on December 5, 2012. Click here to read the entire piece.)
After the Reserve Bank of Australia (RBA) cut interest rates on Monday night, the Australian dollar (FXA) bounced down, up, drifted lower, and then rallied. It is too easy to call this a classic case of the market doing the opposite of expectations once news gets released. Instead, this apparent contrary action is simply part of an overall resilience in the Australian dollar that has been on display for quite some time.
This resilience is presenting quite a challenge to the RBA as it attempts to weaken the currency through rate reductions. It is becoming more and more clear that the RBA will have to drive rates a lot lower before it can get the market’s attention, yet such a move seems unwarranted without a major economic crisis. Notably, nothing in the RBA’s statements indicate that the economy is experiencing major weakness or even that such weakness looms over the horizon. {snip}
The RBA’s concerns regarding the strong currency are supported by an assessment of the Australian economy conducted by the International Monetary Fund (IMF) back in September. {snip}
Overall, the IMF’s report is a well-balanced contrast to some of the bearish assessments I have read that almost exclusively focus on and highlight the negatives and risks in the Australian economy. {snip}
While the relatively strong Australian dollar seems ready to stay aloft for quite some time – at least until the RBA gulps hard and sends rates much, much lower – the Japanese yen looks like a strong currency on its way to a major correction. {snip}
The Australian dollar looks even better against the yen. {snip}
Source: FreeStockCharts.com
{snip}
Be careful out there!
(This is an excerpt from an article I originally published on Seeking Alpha on December 5, 2012. Click here to read the entire piece.)
Full disclosure: long AUD/JPY, short AUD/USD