Intraday Market Thoughts

Will RBA Decision be Lose-Lose for Aussie?

by Adam Button
May 6, 2013 22:39

Only 4 of 22 polled by MNI expect the RBA to cut rates tonight, but this may not prevent the Aussie from extending losses in the event of a pause as the RBA is capable of issuing a dovish statement. Look for fireworks in Asia-Pacific trading as Japan returns from holiday and the RBA delivers a razor thin interest rate decision. The euro slipped on Monday when Draghi mentioned negative deposit rates. Premium clients were shown the Daily-Weekly-Monthly charts on the AUDUSD in the May 3 edition of the Premium Insights, with the rationale laid out for the convergence of momentum dynamics. Both EURUSD shorts remain in progress. Full access is shown on the latest Premium Insights.

A holiday in the UK and parts of Europe led to a less-enthusiastic day of trading. The highlight came when Draghi re-iterated comments at last week's press conference, he said the ECB was ready to act if economic data deteriorates. He also said the ECB will look openly into negative deposit rates and study the issue closely. Last week, Draghi tanked the euro when he said the Governing Council had an 'open mind' on sub-zero rates.

The latest comments led to a 50-pip drop in the euro to as low as 1.3054. Traders were somewhat confused about what Draghi said because he was ad-libbing the comments in Italian at a ceremony for an honorary degree and the official text of his speech was mundane.

The euro later recouped a portion of its losses to 1.3075. Overall, there is very little to take away from the latest comments but it might indicate the ECB is slightly more inclined to negative deposit rates but it's far from a settled issue.

A more decisive central bank move will come at 0030 GMT (1:30 am London time) with the RBA decision. The derivatives market is evenly split on decision with OIS implying a 52% chance of a cut. Economists are less dovish with 21 of 29 in the Bloomberg survey saying rates will remain at 3.00%.

AUD/USD will assuredly break the April low of 1.0221 on a cut and any type of dovish bias will lead to a test of the 9-month low at 1.0115. The speculative market is heavily long and a decline could lead to a race to the exits.

No rate cut might not have the same strong reaction. It depends how the RBA frames the decision. No change in the tone of the statement would erase the 60-pip decline on Monday and could set AUD on a path toward last week's high. If the RBA holds but is more dovish, indicating a cut next month, a rally might quickly fade.

Act Exp Prev GMT
RBA Interest Rate Decision
3% 3% May 07 4:30
RBA Rate Statement
May 07 4:30
RBA Interest Rate Decision (MAY 7)
3% 3% May 07 4:30

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