Traders will be zeroed in on the Reserve Bank of Australia (RBA) when it announces its interest rate decision on May 5 at 12:30 a.m. EDT. The RBA has faced a constant battle to depreciate the AUD in order to remain competitive in global exports. Interest rate cuts and verbal intervention have been used proactively by Governor Glenn Stevens to keep the Aussie from rising higher as the interest rate is Australia is still an attractive 2.25%.
The central bank held rates at its last meeting, which prompted economists to increase the probability of a rate cut at this month’s go-around. The market is divided in its expectations from what once was an almost unanimous forecast of a rate cut in May. The market is pricing in a +72% chance of a –25 basis point cut to +2%.
Last week’s AUD move above A$0.80 would have alarmed the Australian central bank. If the RBA cuts, watch for the statement leaving the door ajar for further cuts. If it does, the AUD should make tracks back down toward A$0.75, its old stomping ground. Any hesitation by the RBA, and Aussie bears will come under considerable pressure, especially after last week’s selling interest that has established ‘hot’ money short positions north of A$0.80.
The AUD/USD has been boosted by the rise in prices of iron ore and a struggling USD. The rate differential has put the Australian currency in demand along with the rising price of commodities. The USD has regained some of the ground lost as the U.S. economy got a somewhat confident endorsement from the Federal Reserve. The challenge facing Stevens is that even with a rate cut laced with dovish rhetoric the Aussie dollar can fall, only to bounce back if Friday’s U.S. employment data proves to be a disappointment.
Central banks continue to drive the FX market, and the RBA will be in focus as it announces its rate decision this week, followed by Australian employment and economic forecast data. However it plays out, this will be an interesting week for Aussie traders as data dependency is on the rise.