USD Trading Outlook
The market is finally starting to evolve as I had expected and I think we are likely to see a much higher AUD in coming weeks. Yesterday we had some disappointing local jobs data and some decent Chinese trade data, and it was the latter which the market reacted to. The AUD market is very short, and it got short at the wrong levels, so any sign of good news is likely to set off more trailing stops in thin holiday markets. Today we have the RBA monetary policy statement and Chinese CPI on the calendar.
The AUD has been remarkably quiet since the RBA rate decision yesterday but I think we are witnessing the calm before the storm. There are some big levels beckoning in all of the AUD crosses and once they break we will see heavy volumes hit the market. Add into the mix that it’s August, when liquidity is traditionally tight, and that positioning is at extreme levels already, and you have all the ingredients for some big moves.
It will be all eyes on the RBA today, with the market universally expecting a rate cut at 2:30 this afternoon. The fact that an election was called at the weekend could put a fly in that ointment, as the RBA has never adjusted interest rates during an election campaign and will have to break with history to do so today. The speculative AUD market is sitting at close to record short levels and with a rate cut priced into the market, the main danger as I see it is that we get a short-covering rally of sorts? Big or small- that depends on the decision and statement.
The NZD has had a very volatile open this morning after Fonterra, their biggest exporter, reported contaminated milk powder which led to countries like China and Russia banning further imports. AUD/NZD has spiked higher on the back of this news. It will be a big week for the AUD with the RBA likely to cut rates by 25bps tomorrow. AUD short positioning is running at close to record level which suggests that a sustained bounce will happen as soon as some good news breaks.
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