Yesterday, the Australian dollar tumbled more than a cent to a six-year low, after the Reserve Bank of Australia cut interest rates to a record low of 2.25 per cent. What does this mean for the AUD/USD, and are there any good trading opportunities?

Statement by Glenn Stevens, Governor: Monetary Policy Decision (Abridged)

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.25 per cent, effective4 February 2015.

Growth in the global economy continued at a moderate pace in 2014. China’s growth was in line with policymakers’ objectives. The US economy continued to strengthen, but the euro area and Japanese economies were both weaker than expected. Forecasts for global growth in 2015 envisage continued moderate growth.

Commodity prices have continued to decline, in some cases sharply. The price of oil in particular has fallen significantly over the past few months. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates.

Financial conditions are very accommodative globally, with long-term borrowing rates for several major sovereigns reaching new all-time lows over recent months. Some risk spreads have widened a little but overall financing costs for creditworthy borrowers remain remarkably low.

The Australian dollar has declined noticeably against a rising US dollar over recent months, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

For the past year and a half, the cash rate has been stable, as the Board has taken time to assess the effects of the substantial easing in policy that had already been put in place and monitored developments in Australia and abroad. At today’s meeting, taking into account the flow of recent information and updated forecasts, the Board judged that, on balance, a further reduction in the cash rate was appropriate. This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.



Daily chart of AUD/USD

Daily chart of AUD/USD


Looking at this daily chart of AUD/USD, we can see that the AUD/USD had traded nicely within a trend channel, providing many easy trades to short and take profit.

While this rate cut may have come as a surprise to some, it certainly did not surprise the price action.

Because while it may have hit new lows, prices rebounded nicely from the bottom trend channel line, after profit-taking by those who shorted near the channel top.

My profit target which was near that level got hit as well.

So, can I short this now?

While the AUD/USD is clearly on a downtrend, I would prefer to minimise my risk and look for a good pullback to go short again, perhaps somewhere in that yellow shaded region marked on the chart.

Remember, trading is about following the trend, but it is also about finding the best low-risk opportunities to enter the trend.

Good luck! 😀

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Just yesterday, the Swiss National Bank (SMB) unexpectedly announced that it was ending its minimum exchange rate of 1.20 swiss franc per euro, dropping this bombshell just a week before the ECB’s expected announcement of quantitative easing.

In addition, they also announced the lowering of the interest rate on deposit account balances that exceeded a given exemption threshold, from -0.25% to -0.75%.

The SNB noted the end of solidarity was one reason to discontinue the cap, saying division is “a trend that is likely to become even more pronounced.” As the Fed readies to tighten monetary policy, deflationary forces mean the ECB is looking to ease anew. The Bank of Japan has already done so.

The SNB had imposed the floor limit in 2011 during the height of the Eurozone debt crisis as the franc strengthened considerably in that period, raising the risk of deflation in the country. Following that, EUR/CHF has hovered around 1.20 for more than three years, never having risen above 1.25 in that period.


Euro dollar vs. Swiss France

Euro dollar vs. Swiss France


However, a weak Eurozone economy, plus the ECB’s constant stimulus measures, caused the euro to weaken significantly in the past year, which has forced the SNB had to continuously depreciate their Swiss franc to maintain the floor limit. But Switzerland has no need for monetary stimulus. While it has been hit by the dire straits of the Euro-area, its economy is not in too bad a state and does not require any boost from the central bank.

To have conducted stimulus when there is no need to, the SNB risks the huge possibilities of high inflation and major price distortion. This has been made worse by Russia’s recent troubles, which saw a huge demand for Swiss francs by Russian billionaires.

The removal of the 1.20 floor is probably a strong signal that the ECB will announce some form of QE in next week’s monetary statement. The SNB has probably judged that Switzerland’s economy cannot afford to run the risks of price distortions brought about by the ECB’s QE and has chosen to abolish the floor limit to negate this risk.


EUR/CHF - Crazy plunge of 2315 pips!

EUR/CHF – Crazy plunge of 2315 pips!


Some food for thought after the 1.20 EUR/CHF floor removal

  • After much sharp movements (see chart above) which included a spike down followed by a bounce, the market appears to think that the fair value for EUR/CHF is around 1.00.
  • Virtually every position which was long USD/CHF was margin-called.
  • Most macro hedge funds, which were long EUR/CHF, were crushed.
  • How much of the SNB’s credibility has been hit? Switzerland has long had a reputation of financial stability; in fact two days ago it just reaffirmed its commitment to keep the floor limit. The shocker yesterday may test the trustworthiness of the Swiss banking system.
  • Currency supremacy war? The US dollar had no competition at the start of the year for the running of best-performing currency in 2015. With a freely-traded franc, that conclusion suddenly doesn’t look so assured.
  • Will Hong Kong be next in breaking its peg with the USD? A rising USD has caused the value of the HKD to climb unnecessarily; previously a weak USD (and hence HKD) plus fund flows from China drove property prices in HK to extremely high levels.
  • How badly will Switzerland’s export-oriented economy be hit?

After getting out of this trade last together with the Synapse Network, I checked my trade records and realised what an awesome homerun it was with a whooping 711 pips profit!

The more uncanny thing was that when I look back this week, I realised that we got out near the exact high, because the USD/JPY has now corrected about 400 pips since we took profit!

Such precision timing with behavioral analysis. Next, we will be looking to long again once the pullback has ended. Stay tuned! 😀

On the downside, we got stopped out of our NZD/USD short trade with a 50 pip loss.

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Tried out trading this new forex pair when I glimpsed a good HFT setup on it, and turns out it was a good choice!

Congrats to those in the Synapse Network who took this trade with me for a quick 196 pips profit! 😀

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