Last night, the Australian dollar plummeted nearly 200 pips to .7625 after the Reserve Bank of Australia cut the overnight cash rate target by a quarter percentage point to a new record low at 2.25%. Many central banks are concerned with global disinflation and last night’s cut makes the RBA the 13 the monetary authority to ease in 2015. The initial drop had extra follow through as 22 of 28 Bloomberg economist expected the Bank to remain on hold.
The RBA believes their currency is overvalued and hopes the cut should support domestic demand and growth. With low inflation and concerns growing regarding the economy, the Bank might even cut at the next meeting.
Price action on the AUD/USD 60-minute chart shows that the current rebound may have been triggered by a bullish butterfly pattern and that the rally has almost erased all of its losses from the rate cut. Downward momentum has been strong within the sharp bearish trend from the .9401 high in early September of last year. The dramatic break of the .80 handle was key for this last move lower and if price does manage to keep building support here(currently at .7800), we may see sellers look to defend that noted handle.
If the rebound has a daily close above .8050, we may see a push higher towards key resistance around .8200. Despite the current rebound, downward pressure should return and we may ultimately see a test of the .7500 handle. If the bearish stance continues to remain strong major support will come from the. 7000 region.
The trade: Sell AUD/USD at .7825 with a stop loss at .8025 and a take profit at .7425. The Risk/Reward Ratio is 1:2
Edward J. Moya
WorldWideMarkets Online Trading