Prepare for A Potential Relief Rally in the Australian Dollar

(This is an excerpt from an article I originally published on Seeking Alpha on August 5, 2013. Click here to read the entire piece.)

After Reserve Bank of Australia (RBA) Governor Glenn Stevens made it clear on July 30, 2013 that the RBA will maintain exceptionally low interest rates for quite some time, the Australian dollar (FXA) broke to fresh 3-year lows against the U.S. dollar. The RBA Rate Indicator showing the odds of a rate cut to 2.50% in Tuesday’s RBA decision on monetary policy soared from 79% to 91%. {snip}


Fresh three-year lows for AUD/USD
Fresh three-year lows for AUD/USD


Even Eurozone citizens can enjoy better prices on Australian goods and vacations
Even Eurozone citizens can enjoy better prices on Australian goods and vacations

Like a slingshot from historic lows to 3-year highs
Like a slingshot from historic lows to 3-year highs

{snip}


Not even the Japanese yen can keep up with weakness in the Australian dollar
Not even the Japanese yen can keep up with weakness in the Australian dollar

Source for charts: FreeStockCharts.com

{snip}

With this pervasive weakness and near-certainty of a rate cut, it seems to me that conditions are ripe for a relief rally. {snip}

The relief rally I am expecting is one that features a dissipation of catalysts for selling. For example, the Australian stock market (EWA) is finally responding again to the beating of the Australian dollar. It rallied throughout July with the rally accelerating somewhat after Stevens’s speech.


The Australian stock market (S&P/ASX 200) rebounded in July and the rally seems to be accelerating now
The Australian stock market (S&P/ASX 200) rebounded in July and the rally seems to be accelerating now

Source: Australian stock exchange (ASX)

With the market anticipating better days ahead again, at some point the currency will have to at least stabilize to represent the improved economic prospects.

More importantly, I cannot imagine the RBA will be able to credibly craft a statement that suggests rates will go even lower. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on August 5, 2013. Click here to read the entire piece.)

Full disclosure: net long Australian dollar, long USD/JPY

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