That Australian Dollar Bounce Prediction was Correct, What Next?
- Written by: Gary Howes
The RBA's interest rate decision prompted that move higher in the Aus dollar that we were predicting. But where does the AUD go next?
The pound to Australian dollar exchange rate (GBPAUD) has faded to 2.1405, about 0.7% lower on Monday’s close.
Sterling has enjoyed a strong start to the new month on the back of a return-to-form in the UK manufacturing sector but the release of the RBA minutes on Tuesday has propelled the Australian dollar complex higher.
As predicted, this is quickly turning into a volatile week for the GBP/AUD and more moves can be expected
The RBA opted not to raise or lower interest rates on the 3rd of November, but the call on a lower interest rate was actually finely balanced with markets pricing in a 45% chance of a rate cut.
The squeeze higher in the Aussie in the wake of the 'no change' decision reflects the evenly-balanced opinion of markets.
This is a tight call and we would expect markets to take money off the table ahead of the event.
Further volatility for the GBP to AUD conversion will come on Thursday will be another “Super Thursday”, with the concurrent release of the BoE MPC statement, minutes and Inflation Report.
"We expect the BoE to keep rates unchanged, considering soft inflation and sentiments of late, and continue to highlight the disinflationary risk of a strong GBP REER," say Barclays Research in a weekly foreign exchange update.
Latest Pound / Australian Dollar Exchange Rates
  | Live: 2.0105▼ -0.28%12 Month Best:2.1645 |
*Your Bank's Retail Rate
| 1.9421 - 1.9501 |
**Independent Specialist | 1.9823 - 1.9903 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Euro to Australian Dollar: Sell
Strategists at Barclays sniff an opportunity here and have made the Australian dollar the subject of their Trade of the Week:
"We recommend a tactical short EURAUD trade going into the RBA meeting. The market is pricing a 45% probability of a 25bp rate cut. If the RBA holds, the AUDUSD is likely to have a brief bounce. But EURUSD is likely to remain under pressure with the ECB ready to ease policy in December."
Barclays note technicals are bearish for EURAUD in the near term. Support erosion signals further downside and we would prefer to use upticks as an opportunity to sell at better levels.
"A move nearby targets at the 1.5165 range lows would encourage our downside conviction. Our next targets are in the 1.4740 area," say Barclays.
Analysts got their call spot-on by predicting the bounce we have seen in the wake of the RBA decision.
The next element of the forecast suggests the move higher will be short-lived. As such, those willing to go with the viewpoint should position themselves for a resumption in Aussie dollar weakness.
February Rate Cut?
The market have have to send the AUD lower over coming weeks though as there are certainly signs that the RBA will cut again.
The RBA left rates unchanged, but altered their forward guidance to open up the possibility of a near-term rate cut.
Specifically, the Bank included the comment “members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand”.
The fact that the Bank included this statement despite noting that “prospects for an improvement in economic conditions had firmed a little over recent months” highlights to analyst Felicity Emmett at ANZ the importance of the 2-3% target band for inflation for the Bank.
ANZ believe an interest rate cut in February is now most likely.
