When the RBA slashed OCR to 1.50 from 1.75 August 3rd, 1 month OIS dropped from 1.59 to current 1.50 and closed at 1.50 everyday or 8 trading days since August 3rd. Normal and traditional Australia OIS positioning is rates trade below OCR and normally by a 5 to 10 basis point margin. The problem with current spreads is both OCR and OIS are not only deeply oversold but bottoms are close.
Viewed from OIS V OCR, bottoms for OCR are located at 1.4994, 1.4893, 1.4848, 1.4829, 1.4736 and 1.4703. For OCR to achieve bottoms then breaks must occur at 1.5029 and 1.5015. First upside breaks must occur at 1.5138 and 1.5144 then 1.5202 and 1.5228. Its not likely 1.5138 will be seen anytime soon. The immediate 25 basis point range is located at 1.5029 to 1.4994 yet in terms of 1, 2 and 3 year monthly averages, OCR is far out of range.
To understand 1.5029 to 1.4994 range and the severe oversold condition of OCR, targets in the averages range from 2.20 to 1.82. The further out in the averages then the more oversold OCR becomes. OCR’s 1.50 position is at dead bottom of an up slope trend line but a historic bottom since OCR was first introduced in 1969.
In OIS, immediate bottoms are located at 1.4985, 1.4888, 1.4808, 1.4787, 1.4743, 1.4645, 1.4616, 1.4562 then further down 1.4401, 1.4390, 1.4303 and 1.4226. First upside breaks from 1.50 are located at 1.5009, 1.5026, 1.5043, 1.5060 and further out and not expected anytime soon is 1.5131. The 24 basis point range is located from 1.5009 to 1.4985.
OIS from the 1.50 close is the lowest rate in Australia history since OIS began trading July 2001. OIS closed at 4.75 July 2001. So severely oversold is OIS, Targets are located from 1.79 to 2.06 and 2.19.
In AUD/USD V OCR, AUD/USD tops are located at 0.7777, 0.7803, 0.8024 and 0.8114. Bottoms are located at 0.7665, 0.7653, 0.7442, 0.7412, 0.7331 and 0.7282. Most important points over next days and weeks are found at 0.7529 and 0.7462. Why the middle 0.7600’s supports never broke from the RBA cut is due to the negative 29% Correlation in the 1 year monthly average. The OCR cut and intended effects to lower AUD will continue to struggle over days ahead.
The economic intended effects from the RBA”s drop to 1.50 is to lower AUD in order to raise or at least sustain GDP as AUD/USD and GDP negatively correlate. Failure to see AUD lower threatens higher GDP. Since the RBA cut, AUD/USD traveled 200 pips from 0.7651 to 0.7753 highs
Brian Twomey, Inside the Currency Market, btwomey.com