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Australian Dollar Strength at Risk on RBA Interest Rate Announcement
Written by article default Friday, 01 October 2010 03:16
Australian Dollar Strength at Risk on RBA Interest Rate AnnouncementRead more at: Forex @ DailyFX - Australian Dollar Strength at Risk on RBA Interest Rate Announcement http://www.dailyfx.com/forex/fundamental/forecast/weekly/aud/2010/10/01/Australian_Dollar_Strength_at_Risk_on_RBA_Interest_Rate_Announcement.html#ixzz11SERenEE
Read more at: Forex @ DailyFX - Canadian Dollar Under Rate, Growth Pressure with Labor Data on Tap Australian Dollar Strength at Risk on RBA Interest Rate Announcement
Fundamental Outlook for Australian Dollar: Neutral
* Australian Dollar bull trend at strongest since early 2008
* Trade the Reserve Bank of Australia interest rate decision
The Australian Dollar powered to fresh multi-year highs amidst pronounced US Dollar weakness, finishing just a stone’s throw from parity on similarly strong moves in the US S&P 500 and other risky asset classes. Overall momentum and bullish sentiment extremes for the Australian Dollar suggest that it could continue higher in the week ahead. Yet the usual warning about sentiment extremes applies, and risk for correction is very high amidst impressive gains. A packed economic calendar in the week ahead means that it could be a make-or-break week for the future of Australian Dollar strength.
A contentious Reserve Bank of Australia interest rate announcement will likely dominate price action for the yield-sensitive Aussie dollar, but traders should likewise watch for surprises in earlier Retail Sales results and late-week Employment Change numbers. Overnight Index Swaps currently price in a 60 percent chance that the RBA will raise interest rates by 25 basis point through their announcement. Interest rate traders clearly believe that such a move is likely, but the lack of true consensus essentially guarantees volatility regardless of the outcome. One could argue that such yield expectations have been a major driver for Australian Dollar strength, and any disappointments could force significant corrections.
Beyond the interest rate announcement itself, it will be important to monitor the attached statement to gauge the likelihood of future rate hikes. Overnight Index Swaps price in a total of 51 basis points of interest rate increases through the coming 12 months. Just over one month ago those same OIS’s were actually calling for interest rate cuts, and the substantial improvement in yield outlook coincided with significant Australian Dollar strength. Suffice it to say, any downgrades in expectations could derail substantial AUDUSD rallies. With Non-Commercial forex futures positioning at its most net-long Australian Dollar in quite some time, any sudden declines could invite a larger correction as traders cover their overextended bets.
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