AUD/USD and OCR: Levels, Ranges, Targets

As mentioned in previous posts, OCR and AUD/USD on a 1 year correlation calculates a stunningly low + 14% and + 80% from successive averages from 2 to 5 years. The RBA risks an unwanted rise in AUD/USD if OCR is cut from current 1.75. Further, if 1.75 is dropped , the best the RBA could achieve is 1.61 due because not only are current OCR averages far oversold but 1.61 begins oversold to the extremes. The persistent problem for the RBA is CPI as much as AUD/USD.

Headline CPI Vs OCR on a 1, 2 and 3 year monthly average basis correlates 52%, 66% and 47%. Trimmed Means Vs OCR from 1 to 3 years correlate 63%, 15% and 53%. Why + 15% low is because the current Trimmed Mean at 0.50 bumps against the 2 year monthly average at 0.55. What correlations mean is OCR at 1.75 contributes roughly 50% to CPI and worse at 14% from the 1 year monthly average in AUD/USD. OCR at current 1.75 is severely misaligned and far to low Vs AUD/USD and CPI. The lower goes OCR, the less it performs to its economic potential to contribute to CPI and AUD/USD.

GDP last at 2.7 and 2.5 is robust but yet again OCR contributes minus 23% and 11% on a 1 and 2 year correlation. GDP to AUD/USD correlates to minus 11% and +11% on a 1 and 2 year monthly average basis. A higher GDP drops AUD/USD.

GDP to headline CPI correlates to negative 35% and 39%. Possibly exports alone contribute to GDP as even Trimmed Means correlate to GDP at minus 35% and minus 0.08%. Current GDP at 2.7 is above the 2.4 and 2.2 monthly averages.

The near term focus for the RBA must be a sustained GDP at current 1.75 in OCR especially as GDP negatively correlates to CPI and more specifically because OCR is oversold and can’t be touched for the August 2 meeting. The only contribution seen from OCR overall is the negative relationship to GDP. A lower OCR may see a higher GDP however its a weak relationship and absolute fact as its main driver to GDP is spurious. Current OCR is not only low but it under performs economically. A further cut by the RBA sends the message to economics in Australia and potential recovery is on hold.

The correct positioning in correlations in CPI, AUD, GDP and OCR should be at least +70 to 80% to offer an idea how far off track, low and misaligned is current OCR. Economic drivers should be in harmony to see a robust economic situation and economic compatibility is currently missing.

OCR must break 1.93, 2.20 and 2.12 to consider higher levels. Lows in price extremes reveal 1.61, 1.50 and 1.37. Highs in the extremes reach 2.4, 2.8 and 2.9. Targets reveal 2.0 won’t break any time soon and remains rock solid resistance. Targets range from 1.82 to 1.97. OCR is oversold in all monthly averages from 1 to 10 years.

AUD/USD remains for weeks built upon a solid base at 0.7318. Just above 0.7318 lies solid supports at current 0.7468 and 0.7457. Both lines change by a few pips each trading day yet both lines held AUD/USD prices above for weeks in small ranges. Both lines must break to see any chance to 0.7300’s.

What decides AUD/USD’s downside fate is 0.7503 and 0.7578. Below 0.7503 then AUD/USD has possibilities to break 0.7468 and 0.7457. Above 0.7578 then AUD/USD begins a new uptrend with top channels located at 0.7774, 0.7736 and 0.7534 from current levels at 0.7500’s.

Overall, until 0.7804 breaks then further rises in AUD/USD must view as a correction in a longer term downtrend. Above 0.7804, a line that dates to 1999 then a serious and lasting uptrend begins.

Brian Twomey, Inside the Currency Market,