Australia Outlook Updated

Neutral sounding Reserve Bank Australia comments after an unprecedented three rate hikes in consecutive meetings had helped encourage a wave of profit-taking that saw the Australian dollar lose about 6.4% against the US dollar in the first 3 weeks of December. However, over the past couple of weeks Australia has reported a series of stronger than expected economic reports, including building approvals, retail sales and a smaller than expected trade deficit. On Thursday, Australia reports Dec employment data. The consensus appears to around 10k, but the Street consistently under-estimated Australian job growth last year and the risk would be on a stronger number.

With today's gap higher, the Australian dollar has rallied 6.8% since a few days before Xmas. The gap itself could potentially be important. Gap theory suggests it is one of three kinds: a) an exhaustion gap after a brilliant rally suggesting a near-term reversal, b) a break away gap suggesting a near-term acceleration, c) a normal gap that is filled in the near-term. Two of the three suggest at least a near-term pullback. Prudence would argue against chasing it higher. The gap extends to last Friday's high near $0.9253. We would see a near-term pullback, ahead of the employment data as an opportunity to add on to the long AUD short NZD position we have recommended.