Do they cut? They should.....

The RBA is to announce their interest rate decision at 12:30 AM ET/0430 GMT with the economists split. On Bloomberg 12 of 27 economists expect a cut to 1.75%. That is pretty much split down the middle.

Recall, the CPI inflation data last Wednesday came out way lower than expectations -0.2% for 1Q vs +0.3% estimate). The YoY also was much lower at 1.3% vs. 1.7%. When the CPI target is 2.0%, AND the currency is 10% off the low AND China is still a wild card AND rates are 2% - much higher than the rest of the advanced economies around the world - they have room to cut. There may be risk of speculative housing stimulus, but that can be taken care of with other measures from a fiscal front if it picks up again.

So it seems like the perfect time to pull the trigger. Sell. Sell. Sell the AUDUSD.

Quite honestly, I thought the fall last week on the back of the CPI to a low of 0.7547 would find sellers against the 200 bar MA on the 4-hour chart (see prior post from last week).

Admittedly, the pair found support where it should have found support on that CPI day. Looking at the daily chart, traders leaned against a trend line of recent lows on the daily chart (see chart above) AND a swing low area from March 2015 (chart above). I still expected the price to recover to the 200 bar MA on the 4-hour chart (green step line in the chart below) and sell off. Well, the price did recover, but it did not stop at the 200 bar MA line. The shorts and sellers grumbled and the pair has been trading above and below that MA level since Wednesday. UGH.

The 200 bar MA on the 4-hour chart currently comes in at 0.76348 and the current price is above at 0.7660. In fact, the price is above both that MA and also the 100 hour MA at 0.7631. From that perspective, the technical picture is a touch more bullish.

However, from a different perspective, the price correction higher since Wednesday's low has stayed below the:

  • 200 hour MA at 0.7689 (green smooth line in the chart above)
  • 100 bar MA on the 4-hour chart at 0.76837 (blue step line in the chart above).
  • 50% of the move down from April 21 high. That level comes in at 0.76908

So the price have moved above support but remains below resistance. The pair is waiting for the news.

What would be more bearish technically?

The close levels to break and stay below would be:

  • 0.76348 for the 200 bar MA on the 4-hour chart
  • 0.7630 for the 100 hour MA

A move below these levels would be the minimum to get things turned to more bearish. On a cut I would not expect the price to trade back above these levels. So they should be levels to define risk on the first corrective move after a cut.

Other key levels on the downside would be:

  • Trend line support (from daily chart ) at 0.7567 and the
  • Yellow area on the daily chart defined by 0.7531-59.

With the current price at 0.7667, that would imply a move down of about 136 pips to the low at 0.7531. That is very doable on a cut. So look for retracements on any first move that is above those levels.

The problem for traders is if the RBA does not cut. If they do not cut, the price should squeeze higher. The first clue would be a move above the 0.7683-908. This is where the 100 bar MA on 4-hour is found and the 200 hour MA is found. A move above that area, will look for the 0.7722-36 (yellow area in the chart below), where there are a number of swing lows and swing highs going back to the end of March (see chart below).

How high can the price go?

I would have to respect any move above the 0.7736 level on "no change", but I would expect that traders would lean against the area on the first test. If it breaks, don't mess with it (unless it fails shortly thereafter). If it does hold resistance, there could be a reversal lower. So let it trade and watch the price action.

A 50-50 chance can often lead to a big move. So have your plan and trade your plan. Do not chase. Look for retracements. I think these levels are key levels that should provide a roadmap for the trade.