AUDUSD rallied 150 pips!

Posted On 03 Nov 2015

The AUDUSD rallied 150 pips from Friday’s lows. The recent spike higher is without fundamental basis but rather mainly due to short covering because of the possibility there could have been a cut. We are looking to sell AUDUSD from between 0.7220 – 0.7250.

Current Market Sentiment:

During the Asian session, the RBA left rates on hold at 2% which was widely expected. The RBA had signalled in their last two prior statements that they would remain on hold and were comfortable with current policy. Since then, little has changed in terms of economic developments. Trimmed Mean CPI was lower than expected but still above 2% y/y for Q3. There was also the increase in lending rates applied by the four big banks, however there was little chance the Bank would be so instantly reactionary to such a development without assessing first the real effects on the economy. In light of that, it was very surprising that the market expected with any probability that the RBA would cut at this meeting. The AUD spiked lower in the seconds before the release, which, given it was the wrong direction, may have been a case of ‘fat finger’, as opposed to insider trading. After the confirmation of rates unchanged, the AUD saw upside, due to the market having priced a potential cut. The statement however added some dovish sentences such as “Inflation is forecast to be consistent with the target over the next one to two years, but a little lower than earlier expected”, and “the outlook for inflation may afford scope for further easing of policy”. This is the first statement since the last cut where the RBA have mentioned scope for further easing. Many investment banks now see a cut in either December, of more likely February, if inflation for Q4 remains low. The statement is more dovish than prior and should weigh on the AUDUSD with the Fed looking to hike soon.

Looking ahead we have Construction PMI from the UK which may add to the bullish sentiment on GBP from yesterday. Watch my weekly risk events overview here to learn more about this event.

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