The Reserve Bank of Australia (RBA) made a surprise decision to cut the overnight cash rate by one half of one per cent on Tuesday this week. The interest rate cut will not be the only major piece of economic news for May, with the Federal Government releasing their 2012/13 budget next Tuesday, May 8.

Let’s deal with the rate cut first.

The Australian Dollar fell by around one cent against the US Dollar in response to the RBA’s announcement, as is shown in Chart 1 below:

Chart 1

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Chart 2 illustrates that the Australian Dollar is currently in a weak position from a technical point of view, having broken through some old bar chart tops but subsequently failing to stay above those tops.

Chart 2

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The Aussie Dollar was already showing a lack of strength when the first higher swing bottom trade out of the 11 April low failed at the 50% milestone, as ABC traders are no doubt aware.

From a technical perspective, I would now expect the Aussie Dollar to break the April low and I will be watching it very closely if it gets back to around parity with the US Dollar (1.0000).

An interesting couple of weeks lie ahead for the Australian Dollar. The 11 April low could have provided a springboard for the Aussie but the sideways movements we have seen since would suggest this was not the final low for this bearish cycle. (Safety in the Market Platinum Traders can review my article in the April edition of the Platinum Newsletter for an insight into two important dates to be watching in the next few months).

This brings us to the Federal Budget to be handed down next Tuesday at 7:30pm AEST. I am not an economist, so I will not try to predict what the government has in store for us. Instead, I will continue to follow what has worked for me in the markets, namely technical analysis.

If there are any major surprises announced in the Federal Budget we will no doubt see some kind of ‘instant reaction’ in the stock market and the Australian Dollar. This may set the tone for the rest of the year but the market will often run hard in one direction for a few days after such news and then turn around and go just as hard in the other direction.

I will revisit the Australian Dollar in my Trading Tutors newsletter article in two weeks, after the markets have had a week to digest the Budget. For those looking to follow the Australian Dollar/US Dollar in the meantime, I would suggest that any volatility we see on a daily chart should be related back to your big picture analysis on the monthly swing chart, as shown in Chart 3 below:

Chart 3

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Currently, the monthly or bigger picture trend is down, with lower swing tops and lower swing bottoms. However, the swing ranges tell a slightly different story. The current upswing was 1,470 points, compared to 694 previously, which represents an expanding upswing.

The current monthly downswing - which is currently incomplete and likely to go further - is currently showing 635 points compared to 1,694 points previously.

If the markets dislike something in the budget and the Australian Dollar falls quickly to around 1.0000 or 1.0100 and then subsequently finds support, we may well have a very nice higher swing bottom trade on the monthly chart.

As always, I would encourage traders to pay close attention to the daily, weekly and monthly swing charts. For those using ProfitSource software for their swing charts, remember we are using ‘Time Swing’ charts, as suggested by David Bowden in the Smarter Starter Pack.

Be Prepared!

Mathew Barnes