After fielding a number of calls from clients on the path of Aussie rates and what it means for the Australian dollar going forward. I have put this video together, which could help identify some key dates and what is actually driving the currency from a fundamental basis.
I personally sit in the camp that the RBA will have to play catch up to current market pricing, and it is the divergence between the current stance of the Reserve Bank and market pricing that is so fascinating. The Aussie swaps market is now pricing in 36bp of cuts, effectively one full cut and 50% chance of a second in the coming 12 months. So, while the implied path of rate cuts has reacted somewhat positively to today’s stronger Aussie (January) trade data ($4.54b), it’s worth considering that we also saw a weak retail sales report (+0.1% vs +0.3% eyed), while Chinese equities are finally succumbing to profit takers.
Our client flow has been all AUD today, but we are also seeing traders managing positioning into tonight ECB meeting at 23:45aedt.
Talk on the traps is the ECB’s new economic projections will be sufficiently low enough that the market will fully expect a new round of cheap liquidity for the EU banks.
There will also be a focus on the negative deposit rate, and this came into full assessment after a strong slowdown in the growth of loans to non-financial corporations, prompting market watchers to feel this negative deposit system is doing damage. To give an idea of market expectations, we see EURUSD overnight implied volatility at 12.3%, which considering that we have a central bank meeting, with genuine change to be announced, seems low. The implied move over this session is 65-points. My USDCAD idea is working well and up 120 points from entry, and rather than moving stops higher to an explicit level I would be closing on a daily close through the 5-day EMA. Happy to hold the position for now, and am not too concerned about tomorrows US non-farm payrolls. A further sell-down in the crude price would naturally help also.
