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Video: Heavy Speculation of a Rate Cut Marks RBA Decision as Volatility Event

Video: Heavy Speculation of a Rate Cut Marks RBA Decision as Volatility Event

2015-05-04 21:32:00
John Kicklighter, Chief Strategist
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Talking Points:

• According to swaps, the market is pricing in a 75 percent probability of an RBA 25bp rate cut Tuesday

• The same level of confidence for a rate cut was priced in for February's move, but the reaction surprised

• Given the market expectations, the more surprising and likely impactful move would come with no change

Want to develop a more in-depth knowledge on the market and strategies? Check out the DailyFX Trading Guides we have produced on a range of topics.

Back in February, the RBA cut its benchmark lending rate for the first time in 16 months to a record low. Yet, despite the policy shift, the Aussie Dollar's immediate losses were quickly retraced before the day closed. Anticipation acclimatized the speculative ranks and short-circuited the follow through potential on the event. Heading into the May rate decision, there are clear expectations (a 75 percent probability priced in) of another rate cut. Implied volatility is also showing traders are prepared for an active response to the event. However, will a realized cut result with the same kind of response as the February move? What happens should the central bank hold? What pairs are better suited to different scenarios. We focus on that in today's Strategy Video.

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