RBA rate cut sets of AUD bulls

August 3, 2016

As predicted the Reserve Bank of Australia looked to cut interest rates overnight in an effort to bolster the economy, the previous rate of 1.75% was cut 25 basis points to 1.50%. This was no surprise to the markets who had suspected that a rate cut would be on the cards in the short term to help the economy as it continued to battle low inflation and a sluggish economy. Building approval data was disappointing as it came in at -2.9% (0.8% exp) and trade balance data came in disappointing as well at -3.20B (-2.00B exp). These were minor movers didn't have the same level of impact though in relation to the rate cut which caused an adverse reaction to the market and actually saw a rally much to the surprise of pundits in the market.

The rally after the rate cut saw the AUDUSD climb to touch resistance at 0.7638, but this was quickly pushed back as the market looked to take profit. So far the market has reacted positively to the announcement and the rally has been outside what many would expect including myself which expected a dip in the AUD overall.  It's likely we will still see that dip in the long run and a push down to the 20 day moving average looks in line with the short term movements if we see strengthening in the USD as markets call for further rate cuts. Support levels at 0.7517 and 0.7472 are still prime targets for bears in the market looking for downside in the long run, and I expect to see markets make an attempt in the long run for these levels after the recent rate cut and talk from the RBA.

The S&P 500 has found itself under pressure yet again and this time the bears that I spoke about previously have come calling and looked to claw back some of the recent gains. Many are expecting the FED to look put pressure on the doves and up interest rates in the long run in an effort to return to normal monetary policy. This has been packed up by recent comments from the Fed's Lockhart saying "asset valuations at the moment particularly deserve watching as they are relatively high". The bounce down below resistance at 2168.50 has so far managed to hold out in the long run and I expect that it will continue to act as a ceiling in the short term. The push lower though has so far failed to push through support at 2152.11, I would expect this level in the short term to come under increasing pressure and for the market to look to push through here.

Lastly, oil markets continue to find a large amount of volatility. Recent private oil data has shown a draw down in crude inventories and if this carries onto the week it will enable the bulls to come back into the market and hold back bearish movements. 

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