The central bank of Australia, the RBA, cut rates last night by 0.25%, to 2.75% from 3%. Australia is slowly converging to the global interest rate of 0%.
I became bearish on the Aussie Dollar last month with this trade. The main catalyst for me in pulling the trigger was the huge commodity swoon in precious metals, copper, and oil. The Chinese slowdown has been a longer-run story, but it had not affected the Aussie Dollar for the past couple years. The carry or perceived carry (Mark Dow has a great post on that topic here) has kept Aussie bid despite the weakening fundamental picture.
But the rate cut last night could be the catalyst for a bigger move lower if important technical levels to the downside break. We are basically right at the first level around 1.0150 that I mentioned in that trade post last month:
But on the longer-term monthly chart, there has been a wedge developing over the last 2 years that shows the indecisive tug of war between buyers and sellers of the Aussie dollar vs. the U.S. dollar. Here is the 7 year chart of AUD/USD, illustrating the recent wedge:
If 1.0150 breaks, 0.985-0.99 is crucial long-term support, and an area where I might exit my trade on the first test. I would want to see how it acts, and the path it takes to get there, before making that decision, but it’s an interesting long-term pattern that could have significant implications for this longstanding currency winner.