Global markets rally, ASX buoyed by RBA cut, AUD erases losses, ASX futures up a whopping 97 points

Well the saying "if you're not long you're wrong" certainly rings true at the moment, with global equities, oil, copper, iron ore and--since yesterday's RBA-related fall--the AUDUSD currency pair all higher overnight. Much of the support in commodities and commodity currencies came from a weakening US dollar - I genuinely hope we see more of this. And while some may think it is ludicrous to suggest that the tail has just wagged the dog, it is certainly possible--given the RBA's credibility--that the US witnessing the interest rate cut in Australia has made traders there think twice about the strength of the perceived pressure on the US Federal Reserve to raise interest rates this year. I suffer fairly heavily from confirmation bias here, because I believe that the world does not need a stronger US dollar (which is a bit of a tax on developing economies, including China) and from my view enough has been done already to get the euro currency into a position to benefit from recovery efforts there.

Now let's have a look at the delicious performance of the Australian ASX 200 equity index futures in today's first chart. It's a great looking stretch of performance, but let's face it - it's not sustainable. So what I believe investors should be prepared and realistically-hoping for is for the 5,500-5,550 level to act as buying support and give our market a nice base to build from in a more moderate fashion than what we're seeing right now. Nonetheless, there is no doubt that yesterday's RBA rate cut is a positive for markets. Why?

  1. The RBA didn't need to cut, they wanted to cut - a big difference. This came from a place of opportunity rather than desperation.
  2. Home equity wealth just got a boost (unnecessary but welcome) and the Australian economy as a whole can feel little anxiety in 2015 with regard to fallout from consumer debt in general.
  3. The 'listed economy', or equity markets, will glisten even more because these risk assets today present an even more attractive return over risk free assets (obviously this comes with its dangers).
  4. If the RBA has indeed just taken some of the pressure of the US to raise rates (believe me, this cut was extensively covered in global financial press last night), then a weaker US dollar will benefit commodity prices.
  5. The drop in the oil price and commensurate lift in potential discretionary household spending didn't seem to be getting much traction, this cut may well be the spark to ignite the tinder box (probably a bit dramatic of me, let's see)
In today's second chart I have used the continuous ASX 200 SPI futures to show the two similar instances in terms of a rally of the magnitude of what we are seeing at the moment - it's a bit hard to see, but in February 2014 we had 16 straight positive sessions before the rally exhausted; in October we had 14 straight positive sessions before things broke up; and last night we put in our 12th straight positive session (remember I'm referring to futures, not the day session). Markets are not purely scientific so do not bet that in two to four sessions things will definitely turn; however, I believe that traders should be prepared to use a strategy whereby you trail a stop below this market and enter a short position with a view some profit-taking emerging at some point soon. Investors can just sit tight.

Lastly I've shown a chart of the last 24 hours or so for the AUDUSD currency pair. You can see there that while FX traders worldwide sold the Aussie dollar on the back of the RBA interest rate cut, the 'risk on' move last night pushed traders out of the US dollar and into equity markets, which helped the AUDUSD recover back to previous levels.

Today’s charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to get your free $100,000 demo account.

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