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Trading Currencies: Pulling One Out of the Bag

The RBA's Policy Tools

The RBA appears to be 'pulling one out of the bag'. Having exhausted all its policy tools in March by setting new records lows with cash rates and market intervention, the RBA's communication has been that the Board hoped fiscal policy would now be the main driver for economic growth. In other words, the board was out of policy ammunition. Check out price of AUD today.

New Tools to Revive the Economy?

However, in a speech to the Australian Industry Group, it appears that maybe the Board has one more package to pull out to help 'Team Australia'.

The package would likely include:

  • Cutting the cash rate to 0.1% from 0.25%

  • Extending its bond purchase objectives to capture 5- and 10-year bonds

(Considering it's advocating for the Federal and State governments to spend up big, lowering the borrowing rates for government is a Team Australia move. It also looks like making this program open-ended.)

  • Expanded the Targeted Curve Control (TCC) program in the 3-year bond to target 0.1% rather than 0.25%

  • Term Funding Facility (TFF) also moved to 0.1% from 0.25%

What this means is that what is referred to as the 'effective lower bound rate' is being moved to a new 'effective lower bound rate'.

When will this be happening?

The time of this action is now forecasted to be the same day as the Federal Budget – October 6. This would be a 'double-whammy' on the stimulus front for both the long and short term as huge amounts of monies are released into the economy.

The reactions in the AUD from the speech have been telling. Get price updates on AUD now.

Recent AUD/USD Trend

There is clear breakdown from his speech and now a second breakdown of a wedge pattern has occurred as economists line up to confirm the view that the Bank will move on October 6.

How is the market forecasting the AUD trend?

Throwback to last Friday, experts from derivatives industry were quite divided on the trend of the AUD in the coming week. Yet they were holding a bearish forecast on the pair in a month's time. As the forecast is updated on every Friday, it is likely that the experts will have a consent on a bearish trend this week after Guy Debelle's announcement on Tuesday.

Source: Data on 18 Sep on Mitrade (updated every Friday)
Source: Data on 18 Sep on Mitrade (updated every Friday)

Keep an eye on the derivatives market

Volatility of the AUDUSD in derivatives market has recorded as high as approximately 34.6% since the beginning of this year, together with the 0.4%* price slam on the remarks on Tuesday. Forex is still widely traded over-the-counter, where traders are allowed to trade with leverage and relatively low deposit. With the product's characteristic that offers traders the direction to go long or short, traders can grasp more opportunities during this volatile period.

Traders can observe the volatility, but be wary nearing the October 6 meeting as volatility will be high as there is a chance the Board could wait until November to move. Receive updated news that may affect the AUD price movement.

*Source: News from Mitrade

The article is prepared by Lucia Han from Mitrade. Get more in-depth analysis and explore their award-winning platform.

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