Bearish Australian Dollar traders are bracing for a higher opening on Monday as the currency is expected to strengthen on the back of the surprise election victory over the weekend by the nation’s center-right government. The news is not likely to reduce the chances of a Reserve Bank of Australia rate cut over the short-run, but it could spook some weak speculative short-sellers to aggressively cover their current positions. Nonetheless, gains are likely to be limited because the overall tone in the market is bearish.
Last week, the AUD/USD settled at .6868, down 0.0131 or -1.87%. According to early calls at 19:36 GMT, the Forex pair is expected to open at around .6924.
Whether the AUD/USD continues higher beyond that level will be determined by how willing shorts will be to take profits and cover positions. Technically oversold indicators could contribute to gains. Furthermore, the price action could be influenced by a reduction in the chances of a second rate cut later in the year.
What is Causing the Quick Price Reversal?
According to Bloomberg, “Despite trailing in most opinion polls, Prime Minister Scott Morrison waged a relentless attack on the Labor Party’s progressive agenda to take action on climate change and strip tax perks from wealthy Australians. At the same time, the government ran on its record of economic management, across-the-board tax cuts and a return to a budget surplus.”
According to Andrew Ticehurst, Sydney-based rate strategist at Nomura Holdings, “As Labor’s tax proposals are off the table, giving some relief to the housing market, and with the incumbent government being viewed as stronger economic managers, business sentiment is expected to improve.”
“It’s a net positive for the equity market and the Australian Dollar will likely bounce,” Ticehurst wrote in a note to clients dated May 19.
Ticehurst also announced, “With a surprise election result over the weekend, we immediately square up our tactical short in the Australian Dollar and expect short-end rates to rise.”
Others to Follow Suit
Professional currency money managers just like most hedge fund managers, follow “The Herd Theory”. So when one starts to exit shorts aggressively, others tend to follow first then ask questions later. Therefore, we expect to see a solid short-covering rally over the near-term.
Keep in mind that other than aggressive speculative buyers, smart money is not going to chase the Aussie higher, looking for a “Home Run” trade. Most professionals will be making risk adjustments to their portfolios and not trying to establish new bullish positions.
Also note that it is possible for short-term rates to rise, while the market still believes the RBA will cut rates. This happens in the U.S. markets all the time, for instance, with Treasury yields sometimes falling during periods when the Fed is hawkish.
This article was originally posted on FX Empire
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