The Australian dollar has been remarkably weak across the majors as risk aversion leads carry trades to sell-off sharply. Meanwhile, the Reserve Bank of Australia is expected to cut rates by 50bps to 6.50% tonight. How will this rate decision impact AUD/USD, and is there a chance they will only cut by 25bps?
The Australian dollar is just one of many currency victims in the broad sell-off of carry trades, while its status as a "commodity currency" has not helped either given the significant declines in commodities like oil. Focusing more specifically on AUD/USD, the pair is down almost 7 percent from Friday. However, it is worth noting that after touching the psychologically important 0.7000 mark, AUD/USD rebounded more than 200 points within an hour. Will the rebound continue or is AUD/USD bound to break below 0.7000? Currency Performance Versus the Australian Dollar Since Friday Source: Bloomberg Tonight's event risk may decide as the Reserve Bank of Australia will announce their rate decision at 23:30 EDT. According to a Bloomberg News poll of economists, the RBA is expected to cut rates by 50bps to 6.50 percent. This would mark the lowest rate in a year and the second rate cut in a row, as the RBA reduced the cash rate by 25bps on September 2. While inflation remains above the RBA’s 2-3 percent target, signs of slowing domestic and international demand led the Reserve Bank Board to judge in September that there was room for interest rates to become “less restrictive.” Meanwhile, Credit Suisse overnight index swaps are pricing in over 150bps worth of rate cuts during the next 12 months, and if the global economic slowdown and deterioration in the financial markets continues, we’ll likely see this come to fruition. However, there are two factors to watch here: 1) if the RBA only cuts by 25bps and 2) the Board’s policy statement for some sort of forward-looking bias. 1) If the RBA only cuts by 25bps to 6.75 percent, AUD/USD is likely to surge higher initially. However, if the Board's policy statement suggests that they will cut rates further over the next year, the pair could subsequently pull back. 2) If the RBA does indeed cut by 50bps to 6.50 percent and indicates that they will ease monetary policy further, AUD/USD will likely return lower for another test of 0.7000. Related Articles: Australian Dollar/US Dollar Exchange Rate Forecast, Australian Dollar May Rise on Risk Appetite, Smaller Interest Rate Cut, 5 Key Events for the Forex Market This Week 10-06-08 Written by Terri Belkas, Currency Strategist of DailyFX.com E-mail: tbelkas@dailyfx.com