Fundamental Report – March 6, 2013: US Dollar Higher Ahead of RBA Meeting

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The US Dollar is slightly higher to start the week as investors position themselves for the upcoming Beige Book release from the US Federal Reserve, and the monetary policy meeting from the Reserve Bank of Australia. These central bank events will likely guide sentiment for the first part of the week, as the statements released after these meeting will give key indicators for the future of interest rates and potential endings for quantitative easing programs.

At the moment, markets are expecting a positive outcome for the Beige Book, to show that the US economy is recovering in a balanced way, and if the result meets the market expectation, the US Dollar is likely to strengthen against the Euro and Yen. This is because investors will express improved risk sentiment and this will viewed as bullish for the USD/JPY. In the EUR/USD, positive US data will propel the negative momentum already seen in the Euro and likely push the EUR/USD back below the 1.30 level.
Larger volatility, however, is expected after tomorrow’s RBA policy meeting, as the market is somewhat divided on the prospects for an interest rate decrease from the Australian central bank. The potential for dual outcomes essentially means that some portion of the market will inevitably be surprised, caught off-guard and forced to reposition, and this means that there is a bigger chance for breakout activity once the actual results are made public. A decrease in Australian interest rates (or even the suggestion that rates might be lower in the near future) will be bearish for the Aussie Dollar, and send the AUD/USD into the low 1.0100 areas.

It is particularly important for traders to pay attention to the outcome of this event, because this will be followed by the GDP release from Australia on Wednesday and if these two data events agree with one another, we could easily see the beginning of a new trend in the Australian currency. In the most bullish case, there will be no change in interest rates and a strong GDP number, and this would likely send prices to a test of resistance at 1.0280. In the most bearish scenario, we will see an interest rate reduction and a weak GDP figure; in this case, we will almost certainly see a test of parity against the US Dollar.

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