AUD Predicted to Enjoy a Bounce, NZD Outlook Improves Markedly

The Australian dollar (Currency:AUD) has staged a relief rally in the wake of an interest rate cut at the Reserve Bank of Australia. The AUD rally comes on the back of the observation that the RBA did not suggest any further cuts are in the pipeline.

Widely anticipated by the market, the Reserve Bank of Australia went ahead and cut the cash rate by 25bps to 2.50%.

"Even though this was widely predicted, the Aussie has strengthened against most of its major counterparts as the RBA reduced expectations of further interest rate cuts after reducing the cash rate to a record low. Will this new found Aussie strength last? Probably not," says Richard Driver, Analyst at CaxtonFX.

Driver says his predictions for the British Pound Sterling show it will likely be dominant against the Aus dollar going forward, however tomorrow's BoE inflation report has halted sterling buying for now:

"Currently trading at 1.7083, this bounce in the Aussie's favour is only temporary as the RBA still have a long way to go. A move to 1.72 is probably not on the cards again until we know where the market stands with tomorrow's BoE Inflation Report."

However, Boris Schlossberg at BK Asset Management warns that the Aussie dollar could realise further gains:

"The fairly neutral statement by the Australian monetary authorities that offered no hint of any additional cuts in the near future, was taken positively by Aussie bulls and the pair rose through European session taking out the psychologically key 9000 level by mid morning trade.

"The next key event for the pair will be the AU employment report due Thursday. If the data shows some stabilization it would take the pressure off the RBA to ease more and could extend the recovery in Aussie."

Outlook for Australian dollar remains volatile

Sean Lee at FXWW points out that the majority of foreign exchange market place players are short on the Australian dollar (ie. holding positions in anticipation of further declines in AUD). This combined with the observation that volumes are low, in typical August trading conditions, could create the potential for a relief rally should a large amount of positions be closed:

"That spells danger in my book. The big banks reported significantly lower volumes overnight and with the market already running at close to record shorts, what’s going to happen if they all try and exit together! If you’re short, keep those trailing stops tight would be my advice."

New Zealand dollar in fresh rally

The New Zealand dollar (Currency:NZD) has gained on reports that China has not imposed a blanket ban on its dairy products:

• The Pound to NZ Dollar is 0.5 pct in the red (on a day to day basis) at 1.9529.
• The Euro to New Zealand dollar is 0.2 pct in the red at 1.6919.
• The New Zealand dollar to US dollar exchange rate is 0.46 pct higher at 0.7858.

"The Kiwi has strengthen after reports from Fonterra Cooperative Group Ltd state that China has not imposed a blanket bank of New Zealand's dairy products. After worries due to quality issues with some of its products this statement has helped the Kiwi to gain ground against its counterparts whilst also drawing strength from the RBA's decision to cut its cash rate by 25 basis points to 2.50%" says Driver.

GBP/NZD is trading at 1.9538 and with New Zealand's Unemployment rate and quarterly employment data being released tonight Caxton FX predict range-bound trading today and potentially higher levels overnight.