RBA Rate Decision Talking Points:
- The Reserve Bank of Australia meets on Tuesday, June 3 at 04:30 GMT; rates markets are pricing in a 38% chance of a 25-bps rate cut.
- Price action in AUDUSD has been choppy of recent, and now the downturn in place since mid-April may be coming to an end.
- Retail tradershave remained net-long since April 18 when AUDUSD traded near 0.71738; AUDUSD price has moved 2.2% lower since then.
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06/04 TUESDAY | 04:30 GMT | AUD RESERVE BANK OF AUSTRALIA RATE DECISION
Since the last Reserve Bank of Australia rate decision on May 7, economic data trends have proved disappointing. The Citi Economic Surprise Index for Australia, a gauge of economic data momentum, fell from 43.9 on May 7 to 26.9 on May 31. While there was neither a GDP nor an inflation report released, the data that did come out proved middling at best. March Australia retail sales grew by 0.3% after adding 0.9% in February (m/m), while the April Australia jobs report showed a strong topline figure that was undercut by a surprise rise in the unemployment rate.
In the interim period since the last RBA meeting in May, rates markets have continued to pull forward expectations of a 25-bps rate cut into the first half of 2019. After the May RBA meeting, there was a 59% chance of a 25-bps rate cut in June; currently, those odds sit at 93%.
Given that market pricing is very tight as is –there is a 70% chance of a second 25-bps rate cut by September (overall, a 79% chance of two cuts in 2019) – it will take a lot for the RBA to not disappoint steep dovish expectations. When a policy decision is priced-in this far in advance, it shouldn’t be a surprise if the corresponding currency (in this case, the Australian Dollar) doesn’t respond with a significant price reaction.
AUDUSD Technical Analysis: Daily Timeframe (June 2018 to May 2019) (Chart 1)
A technical analysis overview of AUDUSD prices showcases a currency pair that may be attempting to bottom. Price is currently enmeshed in the daily 8-, 13-, and 21-EMA envelope; AUDUSD has closed below the daily 21-EMA since April 22. But with the daily 21-EMA being tested for the first time in five-weeks, there is tangible technical evidence that a turn may be in the midst of its early stages (helped by broad US Dollar weakness).
A move back above the daily 21-EMA at 0.6944 would increase the likelihood of a return back to the former 2019 closing low established in January at 0.6982. Otherwise, if AUDUSD were to fall below 0.6899 (the low during the last week of May), then traders may want to rethink the perspective that prices are bottoming out.
IG Client Sentiment Index: AUDUSD Price Forecast (May 31, 2019) (Chart 2)
AUDUSD: Retail trader data shows 77.7% of traders are net-long with the ratio of traders long to short at 3.49 to 1. In fact, traders have remained net-long since April 18 when AUDUSD traded near 0.71738; price has moved 2.2% lower since then. The percentage of traders net-long is now its highest since Apr 25 when AUDUSD traded near 0.70185. The number of traders net-long is 9.5% higher than yesterday and 7.7% higher from last week, while the number of traders net-short is 16.8% lower than yesterday and 4.8% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUDUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUDUSD-bearish contrarian trading bias.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at [email protected]