The main event in the forex market today is the RBA meeting at 0330 GMT (2230 GMT).
The market has boiled down the decision into three options.
- A rate cut to 2.25%
- A dovish stance implying a rate cut in March
- A not-so-dovish stance implying perhaps no cut in March
It’s a close call. Australian cash rate futures imply a 56% chance of a cut and a 44% chance of holding. The chance of a cut by the March meeting rises to 88%. The OIS market is a tad more dovish on all fronts.
Economists are more firmly in the ‘no cut’ camp with just 7 of 29 in the Bloomberg survey forecasting a cut.
The Australian dollar has been beaten up for months but the selling accelerated after the surprise cut from the Bank of Canada, dovish rhetoric from the RBNZ and some clown in the Australian press implying his sources said there will be a cut.
Technically, AUD/USD fell to the lowest since July 2009 on Thursday and the 60-pip bounce today looks tiny in comparison to the scope of recent losses.
AUDUSD daily chart
The USD is generally weaker right across the board but the Australian dollar is the second-best performing G10 currency today so there is some broad AUD strength. It’s no more than position squaring today as shorts take profits ahead of a tricky decision.
Further reading on the RBA:
- Goldman Sachs says RBA to hold
- Goldman Sachs says a lower Australian dollar faces a “high hurdle”
- Fighting words from Aussie stockbroker – Cut or else!
- Roubini Global Economics says no RBA cut tomorrow, but a shift to an easing bias
- TD Securities/Melbourne Institute (MI) Inflation Gauge for January: +0.1% m/m (prior 0.0%)
- ANZ not expecting a cut from the RBA tomorrow, but a shift to an easing bias
- Weak economy set to spur Reserve Bank cash rate cut on Tuesday – Sydney Morning Herald
- BusinessDay forecasting panel predicts RBA on hold in 2015
- Australia press: “Can RBA resist the markets’ call for a cut?”
The best point may have come from Goldman Sachs:
Unless the Reserve Bank of Australia signals more than 50 basis points of cuts then the potential for the Australian dollar to fall further “is likely to be limited”
