The ASX (Australian Stock Exchange) tracker for rate expectations dropped further to start the new year. The RBA (Reserve Bank of Australia) Rate Tracker dropped the odds of a rate decrease for the next meeting on monetary policy from 9% to 7%.
A round trip for rate drop expectations
Source: ASX RBA Rate Tracker
This decline in expectations should help firm up the Australian dollar (NYSEARCA:FXA) for at least the four weeks going into the February RBA meeting ... at least until/unless Governor Stevens reiterates his 0.85 target for AUD/USD in a new and creative way. Almost on cue, the Australian dollar experienced a small bounce and relatively strong start for 2014. AUD/USD has bounced around in a tight range since mid-December even as the steep downtrend in place since late October looms heavily overhead.
Australian dollar clinging to recent lows
I am inclined to bias long for trades on the Australian dollar unless it closed below 0.88 and follows through with additional weakness. It is very conceivable that the Australian dollar could rally into the (downtrending) 50-day moving average (DMA) in the weeks heading into the RBA meeting. The U.S. dollar (NYSEARCA:UUP) has been lackluster since December's Fed announcement of a "sample" of tapering, so I will not be surprised to see bets against the U.S. dollar migrate over to AUD/USD.
The February RBA meeting will be another one of those closely watched central bank pronouncements. In particular, will the RBA come up with rhetoric and/or policy to back-up the 0.85 target that Stevens issued in mid-December? If not, the Australian dollar could rally right through the meeting.
Be careful out there!
Additional disclosure: In forex, I am net long the Australian dollar