[U][B]TRADING AUD CASH RATE 130806 TUES 0430GMT[/B][/U]
According to the OIS, an interest rate swap, the market is pricing in a 90% chance of rate cut of 0.25% by the RBA. If RBA cuts the interest rate to 2.5%, it will be a historic low. Remember that during the 2007-2009 global financial crisis, RBA slash interest rates from 7.25% to 3.00% within 8 months. And RBA stopped at 3.00% and never moved it lower after that. However, the Australian government has just called for an election on 7th Sept 2013. Will RBA cut interest rates again so near to the election date? The political pressure to maintain the interest rate at current levels could be very strong. Or will RBA put the interest rate on hold, and wait until an opportune time to cut after the election? So there we have, the $1 million dollar question on every trader’s mind. How would the market react to the interest rate decision on tuesday?
This is what i believe should happen. With the market having price in a 90% chance of a rate cut, it means that every major banking institution has already shorted AUDUSD days and weeks in advance. With 90% of everyone already short, who else is left to short? My answer, not many people.
[U][B]Scenario #1 (RBA cut interest rates to 2.50%)[/B][/U]
If RBA cut interest rates at 0430GMT, i think there may be an initial knee-jerk reaction to the downside after the interest rate announcement. And after the initial knee-jerk to the downside, there may be a rebound rally up as the traders take profit on their short positions. This is possibly a classic case of “buy the rumor, sell the fact.”
It is hard to put in a price level as to where i should buying my long positions. The key is to watch the price action. Here is my trading plan.
Wait for the selling to stop
When selling stops, there should be a sideways consolidation
During the consolidation, buy first 1/3 with 30pips stop loss
If first 1/3 is not stopped out. and price continues to consolidation, then buy second with 30pips stop loss
If i am not stopped out yet and price breaks above top range of consolidation zone, buy my third and final 1/3 with stop loss below the bottom of the range
[U][B]Scenario #2 (RBA maintain interest rates at 2.75%)[/B][/U]
If this scenario happens, there is going to be a major short covering rally. AUDUSD can go up more than 100pips within minutes. In this case, look to take an aggressive long position on any pullback.