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OANDA FX VIEW: Aussie dollar in for a big week

Announcement posted by de2 Communications 02 May 2016

SYDNEY - 2 MAY 2016: The local market is in for a huge week with Tuesday’s Reserve Bank of Australia’s policy review and the Federal Budget. 

“In the wake of last week's tepid inflation report, traders have been increasingly pricing in the probability of an RBA rate cut,” said Stephen Innes, senior trader at FX and CFD firm OANDA Australia and Asia Pacific

“Local lenders now jumping on the band wagon for good measure,” he said.  

According to Innes, “The issue at hand is not so much the current economic conditions but rather the across the board weakness in last week CPI reading which came in lower than the RBA target band,”

Innes notes that many are viewing miss on CPI as an ominous sign that the RBA target may stay below through 2016.

“Many are viewing the miss on CPI as ominous sign that even if the RBA does not cut this month, low inflation may well stay below the RBA target through 2016, and will ultimately lead the RBA to reconsider the current monetary policy,” said Innes.

“The low level of inflation affords the RBA to adopt a more dovish tone in the statement on Monetary Policy,” he said.

However, even with a rate cut, Innes notes that it is debatable if this will lead to any major position re-calibrations on the Aussie.

“The Aussie could result in a drawn out decline or will it only translate into a knee jerk lower as the market is expecting broader USD dollar weakness in the weeks to come,” said Innes. 

“While much uncertainty swirls around the announcement, what we can say for sure is we are likely set for another volatile week on the Aussie dollar front following last week's CPI and BOJ surprises,”

However, Innes notes that external drivers will likely be key to the Aussie dollar long term fortunes regardless of a short-term capitulation if a rate cut announcement holds true. 

While RBA rate decision is the major domestic release, April's US Employment will attract the most attention. 

“With recent US economic data deteriorating versus consensus forecasts, Friday’s employment report could be a key driver for currency markets by either reaffirming the string of high employment releases in the US or predicting more storm clouds on the horizon for the USD,” said Innes. 

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