Aussie Strengthens Before Fed Meeting Tomorrow, RBA Stevens Talk
Comment of the Day

October 28 2013

Commentary by Eoin Treacy

Aussie Strengthens Before Fed Meeting Tomorrow, RBA Stevens Talk

This article by Candice Zachariahs for Bloomberg may be of interest to subscribers. Here is a section
“The market is looking for further confirmation that tapering is still some time off, and if we do get that we’ll get some more U.S. dollar weakness,” said Jim Vrondas, the chief currency and payment strategist at OzForex Ltd. in Sydney. “We should see some reversal of the nervousness that we saw toward China and the Aussie dollar last week, and a move back toward the 97-cent mark.”

Australia’s dollar gained 0.2 percent to 96.06 U.S. cents as of 5:09 p.m. in Sydney after falling 1 percent last week, the biggest five-day decline since August. The Aussie rose 0.5 percent to 93.80 yen.

The currency will face selling pressure toward the 97.50 U.S. cent level, Vrondas said.

Eoin Treacy's view A number of factors have combined to have a positive effect on Australian equities. Among these are the RBA’s resolve to stem the advance of the Australian Dollar, continued availability of liquidity on a global basis, the change of government to a more market friendly administration, industrial metal prices bottoming, energy export facilities beginning to come on line and generally competitive yields.

The RBA has already dropped short-term rates to historic lows and is unlikely to begin raising them until it has clarity on how the often conflicting interests of the commodity export sector and the domestic services oriented economy are interacting. The Trade Weighted Australian Dollar Index experienced its largest decline since 2008 between April and August. It has since unwound its oversold condition relative to the 200-day MA and has paused in the region of 140. Considering how aggressive the RBA was in weakening the currency at the April peak, the 150 area probably represents a Rubicon it is unlikely to want see the currency strengthen beyond.

In the meantime, the Aussie Dollar has not yet followed through on last week’s downside key day reversal against the US Dollar. However, a clear upward dynamic would be required to question potential for an additional test of underlying trading.
The S&P/ASX 200 Finance Index / S&P/ASX 200 Index ratio exhibits a relatively consistent uptrend over the last two years. While the relationship has been mostly rangebound since May, it turned upwards once more over the last month and a sustained move below 1.093 would now be required to question medium-term scope for continued outperformance by the banking sector. In absolute terms, the S&P/ASX 200 Finance Index is becoming increasingly overextended relative to the 200-day MA but a clear downward dynamic would be required to check momentum.

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