After enjoying superb employment data last week, AUD/USD kicked off the week on a positive note and enjoyed a Sunday gap, resulting from the Chinese news. But this gap closed quite quickly, and that is a sign that things could turn the other way around quite quickly.
And after the sobering up came news from the RBA. Does AUD/USD have more room to fall? Are we getting close to AUD/NZD parity?
Double Edged Chinese Sword
The People’s Bank of China announced a big cut in the Reserve Ratio Rate (RRR) for its banks: no less than 1%. The move, announced on Sunday, is set to release a lot of cash into the Chinese economy. Banks are now required to hold less money against loans they make. Some of these funds can go into fresh investment in industry and housing, thus spurring demand for Australian commodities.
That was the positive reaction we saw initially. But you can take another view of this: the Chinese government made this move, the largest of this scale since the Global Financial Crisis due to urgent need. If that is the case, the effect of the stimulus may be too little and too late for falling commodity prices.
It’s important to remember that Chinese figures were disappointing, and growth was soft.
So, after the gap was closed in the late Asian session, the governor of the RBA Glenn Stevens spoke during the latter part of the European session and also had a knock on effect on the Aussie. He said that the board has clearly signaled rates could be cut again. His institution cut the interest rate in February but refrained from action in March and April.
If that was not enough, he also talked directly about the A$ and stated that the currency has more room to fall over time. In the past, he set levels for AUD/USD, such as 0.75.
All in all, AUD/USD lost around 100 pips from peak to trough and is now around 0.7715. It already got closer to 0.77. NZD/USD is trading around 0.7650 now, so they are not too far apart.
Later this week we have the all important quarterly CPI release in the land down under, and that is critical for the next RBA move.
Does the pair have more room to fall or will it recover like it did with the help of the employment data?
More: AUD looks for resistance – Elliott Wave Analysis
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