RBA Decision as Tight as US Election

Markets were quiet on ahead of the US election but Australian dollar volatility will ramp up after the RBA decision. The best performer on Monday was the yen while the euro lagged.

Markets were dormant on Monday with US election results just 24 hours away. Polls and betting websites show Obama as a modest favorite but markets will be volatile with any result. Emotional trading is likely to spark wild swings and trading opportunities for the remainder of the week.

The RBA decision may be even more difficult to predict than the US election. Although 20 of 27 economists forecast a cut, the OIS market is pricing just a 51% chance the RBA will lower rates for the second consecutive month.

Even if the RBA holds, it is likely to signal a cut in December, which may minimize the upside for the Australian dollar after a knee-jerk rally above 1.04. In the event of a cut, AUD/USD will quickly retreat toward 1.0330 and the market will look for further rate-cutting clues in the statement.

The RBA decision adds some intrigue to markets that were trapped in 20-pip ranges in US trading. The highlight of the session was the ISM non-manufacturing index which fell to the lowest since June but was close to expectations at 54.2. The bright spot was the employment index, which rose to 54.9 from 51.1.

The market continues to eye Greece where leaders submitted an austerity bill to parliament. Greece is facing a debt payment on Nov 16 and is likely to require some form of bridge financing.

-AB