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RBA Preview & Australian Dollar Outlook: AUD/USD, AUD/JPY, AUD/CAD

RBA Preview & Australian Dollar Outlook: AUD/USD, AUD/JPY, AUD/CAD

2020-02-03 21:00:00
Rich Dvorak, Analyst
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AUSTRALIAN DOLLAR AT RISK AHEAD OF RBA MEETING

  • The Australian Dollar looks ripe for volatility surrounding the latest RBA monetary policy update on deck for release Tuesday, February 04 at 3:30 GMT
  • Aussie forex traders may react violently to the RBA interest rate decision with AUD/USD, AUD/JPY and AUD/CAD overnight implied volatility spiking to 5-month highs
  • Overnight swaps are currently pricing a rough 20% probability that the RBA cuts its official cash rate by 25-bps but dovish guidance could weigh negatively on AUD price outlook

Currency volatility expected in the Australian Dollar is at extremes ahead of the upcoming interest rate decision from the Reserve Bank of Australia (RBA). The RBA is due to release its latest monetary policy update on Tuesday, February 04 at 3:30 GMT and has correspondingly pushed Australian Dollar overnight implied volatility readings to multi-month highs.

CHART OF AUSTRALIAN DOLLAR IMPLIED VOLATILITY (OVERNIGHT): AUD/USD, EUR/AUD, GBP/AUD, AUD/JPY, AUD/NZD & AUD/CAD

Chart of Australian Dollar RBA Outlook AUDUSD AUDJPY AUDCAD

Learn More: How to Trade the Top 10 Most Volatile Currency Pairs

Specifically, AUD/USD overnight implied volatility of 11.8% ranks in the top 97th percentile of measurements taken over the last 12-months and is its highest reading since August 14.

AUD/USD BEARISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 25% -9% 1%
Weekly 7% -13% -7%
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AUD/JPY is anticipated to be the most active Australian Dollar currency pair judging by its overnight implied volatility reading of 15.0% while AUD/CAD overnight implied volatility of 10.5% ranks in the top 98th percentile of measurements taken over the last year.

CHART OF AUSTRALIAN DOLLAR RISK REVERSALS (OVERNIGHT): AUD/USD, EUR/AUD, GBP/AUD, AUD/JPY, AUD/NZD & AUD/CAD

AUD Price Chart Australian Dollar AUDUSD EURAUD GBPAUD AUDJPY AUDNZD AUDCAD

Forex options traders have a bearish bias toward the Australian Dollar on balance according to AUD/USD, EUR/AUD, GBP/AUD, AUD/JPY and AUD/CAD overnight risk reversals, which reflect the skew in call to put implied volatility.

AUD/JPY BEARISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 17% 6% 10%
Weekly 23% 9% 15%
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That said, the Australian Dollar could be at risk of extending its recent slide against other major currency pairs in response to Tuesday’s RBA meeting if the central bank delivers a shocking cut to its Official Cash Rate (OCR) or decides to offer dovish outlook.

RBA – RESERVE BANK OF AUSTRALIA INTEREST RATE CHANGE PROBABILITIES

RBA Interest Rate Cut Probability Chart Reserve Bank of Australia

As things currently stand, overnight swaps are pricing about a 20% probability that the RBA cuts rates by 25-basis points at the central bank’s upcoming meeting. Looking to the end of the year there are 0.42% of cuts expected, which is up from 0.20% of cuts priced in on January 02.

The RBA noted in its previous monetary policy statement that “outlook for the global economy remains reasonable” but added that “risks are still titled to the downside.”

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Also, the RBA and Governor Philip Lowe pointed out that “the main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending.

AUSTRALIAN DOLLAR COULD FALL FURTHER IF THE RBA UNDERSCORES ACCOMODATIVE MONETARY POLICY STANCE

Chart of Australia Monthly Employment Change Labour Force Survey Historical Data

Recent labour force data illustrates the overarching downtrend in full-time employment and recent developments like Australia wildfires and coronavirus worries could encourage the RBA to reiterate its dovish bias.

Correspondingly, the RBA could leave interest rates unchanged but underscore its preparedness “to ease monetary policy further if needed to support sustainable growth in the economy,” which could send the Australian Dollar plunging lower.

-- 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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