A Forex View From Afar

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Sell the Rumor for the aussie?

Written by A Forex View From Afar on Monday, October 06, 2008

The Reserve Bank of Australia is expected to cut the Cash Rate by 50 basis points, to 6.50% on Monday, and if so it would be the second cut in Australian interest rates this year. In September the central bank cut 25 basis points from the record 7.25% overnight rate at that time, quoting a reduction in forward growth potential. If market expectations come through the bank would be in its first cutting cycle since 2001, when the bank cut from 6.00% to 4.25% over a 20 month period.

In the last few months the aussie dropped as the market started to price in the fact that the yield differential would be reduced. From the high reached in July the pair has tumbled more than 2500 pips, or 27%. Add to that, today the pair tumbled nearly 700 pips, which is a record, for the time being. In addition to the expected rate-cut today there were other forces at work, including risk aversion and the steep drop in commodities from the last few weeks.

The market is very likely to remain in a risk aversion phase for the following days, adding selling pressure to the aussie. In addition, as the credit crunch deepens, the market’s expectations for further rate cuts from the RBA increases, something that is aussie negative. It is very likely that tomorrow we may see only the “sell the rumor” part, while the “buy the news” will be left without a job because of the current market circumstances.

Traders should take care going long after the news release on the aussie, and smaller targets/smaller lot size would be a recommended strategy. In the case that the market actually buys the aussie after the news, a retrace of today’s move would be welcomed, since it gives the market the chance to get additional momentum to break lower.

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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