No AUD Fear Ahead of RBA

The Australian dollar was the top performer while the US dollar lagged on Monday. The AUD/USD gain comes despite the looming, tough-to-call RBA decision. We look at what's expected and examine the market moves so far this week. On Friday we closed our short AUDJPY at a gain, leaving one AUD trade in progress ahead of the  RBA.

While the market was focused on the FOMC last week, the events that drove trading were the BOJ and Australian CPI report. The later sent the probability of a rate cut today to 54% in the OIS market from 15% beforehand.

Ashraf jumped on AUD/JPY shorts after the inflation data and the pair remains down nearly 400 pips since the post-release hour. A small portion of that eroded today, perhaps as short term AUD shorts covered or due to a climb in industrial metals.

Financial futures positioning shows an increasingly crowded long trade in AUD/USD and that could be squeezed after the 0430 GMT RBA decision.

The cut is the main thing to watch for. The RBA ramped up its anti-AUD jawboning in the latest decision and AUD/USD has risen a cent since (although it's down versus other G10 currencies). Ultimately what may motivate Stevens to cut isn't the current level of AUD, but fear about how high it may rise if he doesn't.

The BOJ and RBNZ examples last week show that this market demands constant dovish action. The only way the RBA could avoid a similar fate is by promising to do more at the next meeting. An interesting scenario would be a cut followed by a clearly neutral bias. In that case, the kneejerk lower in AUD could reverse.

In broader markets Monday the US dollar was generally soft. Some selling came after the April ISM manufacturing index as it slipped to 50.8 from 51.4. The dollar sold on the headlines but the prices paid index rose to the highest since Sept 2014.

Japan is on holiday until Friday.