The Aussie Bounces after a Turbulent Day

ForexNewsNow | Published on October 20, 2010 at 10:16 am

Australian flagNEW YORK (Forex News Now) – The Australian dollar bounced off trend line support after a turbulent trading session yesterday.

The news that the Peoples Bank of China increased their benchmark interest rate yesterday took the markets by surprise, and pushed most risky assets lower, including the Australian dollar.  Most market pundits believe that the move by the PBOC was a pre-emptive move, prior this week’s deluge of Chinese economic data, which will likely be better than the market currently expects.

RBA Meeting Minutes

In other forex trading news, The Reserve Bank of Australia (RBA) released the minutes from its last policy meeting on October 5.  The minutes reflected the decision to keep borrowing costs unchanged was based on the outlook that the global economy would grow at trend over the next few months.

The RBA felt that increasing the lending rate would effectively be tightening financial conditions at the margin since it would constrain credit growth and most likely lead to further currency appreciation.  Overall, the bank’s statement was balanced indicating that over the short-term indicators of current growth in demand, for households and business, remained moderate.  The probability of a rate hike six months from now around 50%, according to the OIS market, which still maintains a tightening bias.

Australia’s Westpac index of leading economic indicators fell in August, suggesting a flattening of economic growth. The index fell 0.1% to 269.2 from the previous month. Still, from year ago, the index was up 5.3%, an ease from July’s 6.8% gain.

Technical Picture

In price action, the AUD/USD initially benefited from the RBA minutes but subsequently was caught in the dominating forex trading news, which was the move from the Peoples Bank of China.

The AUD/USD traded up to 0.9960 after the minutes revealed that the arguments for a further hike were balanced, which given the current make up of the Governors of the RBA, is likely a hawkish stance. However, the currency pair was unable to sustain these levels due to the weight of dollar buying and headed lower to test the trend line resistance near .9960.  The trend line connects that low made in September and October and is a short-term trend line.

The RSI bounces close to trend line support, close to the 50 level on the index.   Momentum is still positive in the index, which will allow the trend to continue if the currency pair is able to climb above par.  On the downside, the next level of support is the lows at .9650, and then the Bollinger low at .9500.  A break of this level could lead to the highs made in August at .9250.

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