AUD/USD: RBA set to flip a coin on interest rates

<p>As the sun rises on a new trading week, markets look like they could use another shot of espresso. The US dollar is trading essentially […]</p>

As the sun rises on a new trading week, markets look like they could use another shot of espresso. The US dollar is trading essentially unchanged from last week’s close, European stocks are trading higher (except for the FTSE, which is dropping on fears of tighter monetary policy from the BOE), and most commodities are ticking lower. While today’s US economic data could help inject some volatility, the top-tier fundamental data will kick off in earnest tonight with the Reserve Bank of Australia’s monetary policy decision.

Heading into last week, the market broadly expected the RBA to remain on hold at this week’s meeting, but Wednesday’s CPI report has shifted expectations dramatically. The headline CPI reading fell to 0.5% q/q in Q3, well below the anticipated 0.7% reading, and the “trimmed mean” CPI, which excludes inflation on the most volatile 30% of items, was even worse at just 0.3% q/q.

In the wake of that disappointing report and another subdued Chinese Manufacturing PMI reading, traders are now almost evenly split on what the RBA will decide; as of writing, the futures market is pricing in a 44% chance of a 25bps rate cut, according to the ASX RBA Rate Indicator. For what it’s worth, the RBA’s “shadow board,” made up of nine Australian National University economists who try to predict what the central bank will do, believe there’s a 35% likelihood that the RBA will cut rates tonight.

Like the market, we’re on the fence about whether the RBA will pull the trigger at this week’s meeting or hold off to see how the economy evolves over the course of the month. For medium- or long-term traders though, the actual decision is less significant than the central bank’s overall policy outlook: even if the RBA leaves rates unchanged, it is likely to add in some dovish language (NAB projects that the statement will add the phrase “recent inflation data points to greater scope to ease monetary policy should the need arise” or similar) that will keep the long-term downtrend intact.

Technical View: AUD/USD

The Aussie’s September-October bounce has apparently stalled out at the 38.2% Fibonacci retracement (.7385), and in our view, rates are unlikely to retest that level even if the RBA remains on hold. If the RBA opts to keep its powder dry, AUD/USD could edge up into last week’s range in the .7200-.7300 zone, but longer-term traders may look to fade that bounce in favor of the long-term downtrend.

Of course, if the RBA opts to cut rates, we’ll likely see a knee-jerk move lower. In that case, the key support area to watch will be from the 6-year low at .6900 up to key psychological support at the .7000 level, though bargain hunters could emerge to support the pair around that zone.

As always, traders should strive to keep the longer-term picture in mind, even though it’s tempting to try and catch every single news-driven move in the market.

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