Forex News Trading Strategies For The Week of February 2nd – 6th

Analysis of this week’s Forex news events,
This week’s “high impact” news event that I will be looking to trade is as follows;
AUD – Cash Rate & RBA Rate Statement – 03:30pm

There has been allot of speculation recently that the RBA will cut rates with commodity prices falling adding weight to the argument that the Antipoldean currency will soon come under added selling pressure following a revision of rates. The Australian economy has been lagging somewhat recently but data has been gradually weakening in conjunction with commodity weakness for the last few months and we know that the RBA are concerned with the sluggish rate of economic growth.

Bearing in mind that last week the Bank of Canada unexpectedly cut their rates accredited to falling oil prices, inflation, the prospect for further inflation and an overall sense of discontent from the BoC with the speed of growth coming from their economy and falling commodity prices.
Australia is the same as Canada, being a commodity linked currency, meaning that most of their growth and GDP is linked to the extraction of those commodities, gold, oil etc.
This is why the market had began to speculate that the RBA could cut their rate during this statement on the 3rd of February, with the current balance being around half of the markets respected economists holding believing that the RBA will cut rates.

If you observe the AUD on your charts over the last weeks you’ll see that the currency has sold off heavily and the reason for that is because the market is pricing in the probability of the RBA cutting rates down to 2.0% or maybe even 1.5%.
On the other side of the argument, economic data as aforementioned hasn’t been too alarming and is dire enough to assure the certainty of a rate revision; with the unemployment rate actually falling and despite a weak CPI if we stripped that to core CPI, it wasn’t that bad.
So basically since the RBA haven’t deteriorated too much with the main driving behind the rate cut argument being the fall in oil and commodity prices particularly copper which will have a knock on effect for the Aussie economy.
The way I’ll be looking to trade this going into rate decision is fairly cut and dry, if they cut I’ll be looking to sell into the move with expectations that the AUD to call to 75cents against the USD with lots of opportunity to continue selling the currency over the coming weeks particularly against the USD . The reason for that is that last week the Fed made it very clear they are still on course to tighten policy despite the markets concerns of a global slowdown and ramifications of a overly strong Dollar and falling oil prices – with the Federal Reserve still happy to hike rates at some point in 2015.

This pins the US Dollar as the current strongest currency amongst all major crosses and pairs, so we want to sell the AUD against that as it is the easiest, simplest way to trade the AUD and this event.
However if the RBA don’t cut we could see a rally on the AUD, given that the market has been pricing in the potential for a rate cut we could see what is referred to as a relief rally when an event doesn’t play out as the market had began to speculate. The best way to trade this outcome would be to trade the AUD against the EUR, so sell the EUR/AUD pair in the event that the RBA do not cut their rate as any moves over the last few weeks on the currency will be reversed if it turns out the RBA keep rates unchanged.
The second part to this trade is of course the statement, so if they don’t cut we want to pay close attention to this statement as the RBA statement could be dovish – so when you’re reacting to that cash rate you’re going to want to tune into a news feed as the statement relating to the cash rate will set the sentiment on how the currency and essentially determine how far it will move against any cross.

Simply because if they don’t cut the rate but are very dovish and say something along the lines of “we are considering/looking at/planning to cut rates imminently” or “have a close eye and things and considering our next move which could very well be a rate cut” any rhetoric like the above could in itself be viewed by the markets as an excuse to sell the AUD – so we just want to careful of that statement.
The ultimate hawkish surprise would be if they don’t cut and they don’t change their statement, in which case we could expect to see he AUD appreciate for the majority of the coming week – however my expectation is that they won’t cut the rate but will run very dovish commentary in which case we could expect to see an initial spike up on the AUD and then that move will be nullified by the subsequent rhetoric from the central bank.

The ultimate dovish surprise is that they cut the cash rate and release a very dovish statement which would undoubtedly send the AUD tumbling particularly against the USD.