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Australian Dollar (AUD): RBA Meeting Preview & Aussie Outlook

Australian Dollar (AUD): RBA Meeting Preview & Aussie Outlook

2019-11-04 22:21:00
Rich Dvorak, Analyst
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AUSTRALIAN DOLLAR OUTLOOK: AUD PRICE ACTION IN FOCUS AHEAD OF RBA RATE REVIEW

  • The Australian Dollar comes into focus with the November RBA Meeting on deck which will follow the central bank’s decision to cut rates by 0.25% last month and third time this year
  • AUD price action has been bolstered broadly by an influx of risk appetite driven by thawing US-China trade tensions recently, but the RBA could reiterate its accommodative bias
  • Enhance your market knowledge with our free Forecasts & Trading Guides available for download or check out How Central Banks Impact Forex for additional insight on how the upcoming RBA rate decision might affect the Australian Dollar

The Reserve Bank of Australia (RBA) is slated to provide its latest monetary policy update Tuesday at 3:30 GMT which sets AUD price action in forex traders’ crosshairs. The Australian Dollar is headed into the November RBA meeting on its back foot with spot AUD/USD and spot AUD/JPY trading down 0.56% and 0.32% from their respective session highs.

Taking a look at spot AUD/USD and AUD/JPY since late September reveals the Australian Dollar’s impressive climb over the last month. Recent strength in AUD price action has been driven chiefly by bettering US-China trade relations and a supposed ‘phase one trade agreement’ expected to be finalized soon.

AUD/USD & AUD/JPY – AUSTRALIAN DOLLAR PRICE CHART: 2-HOUR TIME FRAME (SEPTEMBER 30, 2019 TO NOVEMBER 04, 2019)

AUD Price Chart Australian Dollar November RBA Meeting

Chart created by @RichDvorakFX with TradingView

Shifting focus to the prior RBA rate decision and accompanying press statement suggests that the central bank will continue to maintain its dovish stance seeing that “it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.” The short-term uptrend in the Australian Dollar could begin to unwind, however, if the RBA reiterates its accommodative monetary policy stance as the central bank continues to chisel away at excess capacity across the Aussie economy.

RESERVE BANK OF AUSTRALIA EXPECTED TO LEAVE OCR UNCHANGED AT 0.75% THROUGH YEAR-END

RBA Rate Decision Implied Probabilities Chart

The RBA is expected to maintain its target overnight cash rate (OCR) at the current level of 0.75% following 25-basis point rate cuts revealed at the June, July and October RBA meetings. In fact, overnight swaps are currently pricing a 94.0% probability that the RBA will leave its benchmark interest rate unchanged, which is up quite significantly from the 60.4% probability on October 16 prior to the release of the high-impact Australia employment report that revealed the unemployment rate edged down slightly from 5.3% to 5.2%.

That said, barring any shock move by the RBA, the Australian Dollar will likely respond predominantly to follow-up commentary from RBA Governor Philip Lowe and the central bank’s forward guidance. As such, market priced expectations for the December RBA meeting come into focus. The probability that the RBA stand pat on rates into year-end was just clocked at 76.3%.

AUSTRALIAN DOLLAR IMPLIED VOLATILITY & TRADING RANGES AHEAD OF RBA DECISION: AUD/USD, AUD/JPY, EUR/AUD, GBP/AUD, AUD/NZD, AUD/CAD

Australian Dollar Price Chart Implied Volatility Trading Ranges Ahead of RBA Meeting

Australian Dollar implied volatility derived from overnight forex options contracts has surged ahead of the RBA decision set to cross the wires Tuesday at 2:30 GMT. A jump in implied volatility is to be expected, however, considering the elevated uncertainty and high-impact surrounding a monetary policy update from a major central bank. AUD/USD overnight implied volatility of 9.6% ranks in the top quartile of readings over the last 12-months and is above its 20-day average of 7.1%.

AUD/JPY overnight implied volatility of 9.9% ranks in the top 59th percentile of readings over the last 12-months and is above its 20-day average of 8.8%. GBP/AUD is expected to be the most volatile Australian Dollar currency pair with an overnight implied volatility of 10.0%. Mathematically speaking, 1-standard deviation options-implied trading ranges should encompass price action over the specified time frame with a 68% statistical probability.

AUSTRALIAN DOLLAR RISK REVERSALS AHEAD OF RBA DECISION: AUD/USD, AUD/JPY, EUR/AUD, GBP/AUD, AUD/NZD, AUD/CAD

Australian Dollar Chart of Risk Reversals Ahead of RBA Meeting November 2019

Broadly speaking, forex options traders appear to have a bearish bias on the Australian Dollar headed into the upcoming RBA rate decision judging by overnight AUD risk reversals. A risk reversal reading above zero indicates that the demand for call option volatility (upside protection) exceeds that of put option volatility (downside protection).For additional insight on market positioning and bullish or bearish biases, traders can turn to the IG Client Sentiment data, which is updated in real-time and covers several currency pairs, commodities, and equity indices.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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