Capital Trust Markets – A little after midnight on Monday, Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe is set to speak at the Australian Securities Investment Commission Annual Forum 2014 in Sydney. The speech comes at a highly poignant time, as traders and investors seek out clues as to the performance of the Australian economy, and in turn, the future of its economic policy, in the wake of a potential Chinese economic slowdown.
How might the speech affect the value of the Australian Dollar, and what are the levels to keep an eye on?
In a number of his most recent speaking engagements, Lowe has highlighted the importance of access to startup capital for new businesses, which could be interpreted as dovish. The RBA has already cut its rate to a record-low 2.5%, and statements made by its roster suggest that this will remain so for the foreseeable future, but traders and investors will be well aware that any signs of trouble could spark further cuts.
At present, the main worry for Australia is China. China compounded its spate of data misses on Sunday reporting HSBC manufacturing PMI data at 48.1%, a decline on both the previous 48.5 and the expected 48.7. The data sparked an early sell-off in the AUDUSD, but was not enough to maintain bearish momentum in the pair as current Monday lows at 0.9048 served up strong support. A US manufacturing miss strengthened the upside momentum and the pair looks set to close out the day just shy of resistance at 0.9152 and the 200-day SMA.
If, as many predict he will, Lowe addresses the potential for Australian collateral damage in the wake of a Chinese slowdown, it would be difficult to avoid a dovish tone. While not a certainty, an interest rate cut would be high on the agenda if China cuts its Australian imports; a situation that looks more and more realistic with every Chinese release. Add this to the dip in mining sector investment, which employs more than 750,000 Australians, and there is plenty of potential for downside in the AUDUSD.
A dovish tone would strengthen the resistance below which price currently resides, and offer up an initial downside target at the psychologically significant 0.9000. Looking longer term, a close below this level would validate a target of 0.8893 support, and beyond that, long term lows at 0.8660.
Written by Samuel Rae – Currency Strategist at Capital Trust Markets
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