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RBA cuts rate to historic low; AUD is resilient

The Reserve Bank of Australia (RBA) cut its official cash rate (OCR) from 1.75% to a historic low of 1.50%. Many expected this rate cut so it came as no surprise. 

Here's the statement by Glenn Stevens, Governor of the RBA:

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.50 per cent, effective 3 August 2016.

The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. Actions by Chinese policymakers are supporting the near-term growth outlook, but the underlying pace of China's growth appears to be moderating.

Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia's terms of trade remain much lower than they had been in recent years.

Financial markets have continued to function effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative.

In Australia, recent data suggest that overall growth is continuing at a moderate pace, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term.

Recent data confirm that inflation remains quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

Supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in lending for housing purposes has slowed a little this year. All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.

Taking all these considerations into account, the Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting. (From the Reserve Bank of Australia)

A rate cut should put pressure on the home currency. But in the short-term, the AUD seems to be resilient. Let's first take a look at the Aussie vs. Kiwi (AUD/NZD).

AUD/NZD 1H Chart 8/2

(click to enlarge)

Sell the rumor; Buy the news:
- The 1H chart shows that AUD/NZD has been bearish ahead of the RBA rate cut. 
- This suggests that the market was pricing in the rate cut. 
- When the rate cut came, the market initially faded the AUD/NZD but there was support in the 1.0440-1.0460 area. 
- We now see a V-shape reversal from this support area as price pushes above 1.05 in early 8/2 US session.

Limited upside
- While the reaction around the RBA event risk might be volatile, I think the upside will be limited in AUD/NZD.
- The V-shape reversal in the 1H chart does indeed indicate upside, but it should be limited to the short-term. 
- Looking at the daily chart, we can see that AUD/NZD has been in a choppy sideways mode since 2014. But its 2016 mode has turned bearish since April. 
- I think we should limit the bullish outlook from today's reaction to 1.07.

AUD/NZD 8/2 Daily Chart

(click to enlarge)