Preview of RBA Decision: Can AUDUSD Descend Below 0.7000?
Two weeks ago, the Governor of the Reserve Bank of Australia (RBA) hinted that the bank had some room to cut interest rates to a record low of 0.10%. This triggered a massive selloff on the AUDUSD pair, which has remained under pressure since then.
The RBA is expected to perform this rate cut in a few hours, as well as attempt to get the economy out of its first recession in nearly 30 years by increasing the size of its asset purchases by at least $AU 100 billion. An expansion of AUD100 billion to its government bond-buying program, quantitative easing (QE), is also due on the cards.
However, we have an additional catalyst at work; the US elections. Traders have unwound USD-long positions this Monday to take some profit from last week’s bullishness. They stand ready to drive safe-haven flows into the greenback if the outcome of the vote is inconclusive. On Sunday, the state supreme court in Texas voided a motion filed by the GOP to void nearly 175,000 votes in a drive-on voting centre after the suit said the process did not follow state electoral laws. This may have been a warning shot that the courts could become involved in deciding the winner. The uncertainty could drive safe-haven demand for the greenback, to the detriment of the risky assets such as the Aussie Dollar.
The recent slump is an indication that the rate cut has already been priced in by the markets. This leaves the size of the QE expansion (if any) as the major component of the data release.
Possible Trade Plays
If the RBA expands its asset purchases beyond the consensus of $AU 100 billion, this could be further AUD-negative. This opens the door towards the 0.70034 support target, following on from a possible rejection at 0.70595. If USD longs result from US election-driven safe-haven demand, we could see a further dip towards 0.69160 down the road.
On the flip side, if the asset purchase does not meet the $AU 100 billion expectation, we could see transient strengthening in the Aussie Dollar. This brings 0.71010 and 0.71363 into focus if the momentum can take the pair past 0.70595. This impact is likely to be short-lived as the US elections would continue to weigh on this and other USD pairs. If the RBA holds rates, this would produce a more robust bullish response on the AUDUSD.