Odds on an RBA Melbourne Cup Rate Cut?

November 3, 2015

Odds on a Melbourne Cup Rate Cut?:
While the eyes of the Australian public are on Melbourne for the ‘race that stops a nation’, the eyes of the financial world turn to Sydney for the interest rate decision out of the Reserve Bank of Australia.

Last month the RBA left the Cash Rate on hold but surprising with their dovish tone. The statement that accompanied the decision gave the Aussie some buying interest, pushing the pair back above weekly trend line support that we have been watching price chopping around, but overall respecting.

AUD/USD Weekly:
151103_audusd_weekly
Click on chart to see a larger view.

Whichever way you look at it, today’s decision is very much live and the Aussie dollar in play. With futures markets pricing in a 42% chance of a cut, expectations are low enough that either way the RBA goes, the Aussie will spike. But at those levels, a surprise cut could do some serious damage to the charts!

AUD/USD Hourly:
151103_audusd_hourly
Click on chart to see a larger view.

Soft inflation numbers, export pressure from China and falling consumer confidence has a cut well and truly in play for mine and with the greater risk to the downside, I like this hourly level to manage upside risk around.

The RBA is under even greater pressure to cut following the big 4 bank’s decision to raise mortgage rates out of cycle with the central bank. The banks have blamed their own hikes on new Australian policies aimed at making banks safer that require them to hold more capital and therefore be more resilient to economic shocks to the system. Of course any increased funding costs are always going to be passed down the chain to the consumer and that’s exactly what Australia has seen here.

In an already weak consumer environment, this could have been the last nudge that the RBA needed to cut, potentially forced to limit the effects of the bank’s moves on consumer confidence and spending.

Lastly, something for you punters out there. Something to keep in mind is that the RBA has made its move on Melbourne Cup day in 6 out of the last 9 years. If you’re backing a horse, maybe your focus should be on the RBA instead?

Well, I think I just might take a Trip to Paris at 3pm anyway. Au revoir!

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On the Calendar Tuesday:
JPY Bank Holiday
AUD Cash Rate
AUD RBA Rate Statement

GBP Construction PMI

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Chart of the Day:
We continue our Aussie dollar theme with a look at the EUR/AUD cross in today’s chart of the day.

EUR/AUD Daily:
151103_euraud_daily
Click on chart to see a larger view.

After breaking key resistance at daily swing highs in August, price has since pulled back to the level and re-tested it as support. Price spiked down through the lows to clean out any weak longs (and their lazy stops) before gaining some traction and rallying back up.

In this bullish move, price had also formed a short term trend line that was broken as it re-tested key horizontal support. As this is a cross, I don’t like putting too much weight into trend lines, especially short term, steep trend lines like this one, but the re-test is there all the same.

Even if we get an ‘on hold’ decision from the RBA, it is sure to be accompanied by a more dovish statement from the RBA. If this scenario plays out, falls in EUR/AUD seem limited. Like I said, banking on these steep, short term trend lines holding on the crosses is not something that you would risk your house (or your trading account) on. Buying dips back into support looks my favoured play into the RBA.

Do you see opportunity trading the Australian Dollar around the RBA?

Dane Williams – @VantageFX

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