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RBA meeting preview - a traders' view on where the risks reside

Chris Weston
Head of Research
2 May 2022
If we look at the options market, we see AUDUSD 1-week implied volatility at the highest level since February 2021.

The market therefore expects big movement across the AUD pairs, so this should have big implications for one’s approach to risk and position size. It means the market sees the RBA meeting as a core risk and one where we could see a sizeable move on the day – up or down.

In the video above, I portray how clients are largely positioning for AUDUSD upside, although this seems a greater reflection of expected USD weakness – while the broad array of FX players are running a short AUDUSD exposure, which in theory should limit the downside in AUD.

Where I do see AUD vulnerability is in the current interest rate pricing - a 15bp hike is firmly priced into short-term rates markets, so if the consensus is correct and the cash rate is lifted from 10bp to 25bp, it shouldn’t move the dial too intently. However, with expectations of 38bp of hikes priced for June and 250bp (or 10) hikes priced for the full year, if the statement doesn’t justify this pricing, we could see AUD sellers.

With estimates that the RBAs neutral rate setting (the cash rate setting that is neither stimulatory nor restrictive) sits at 1.70%, if the RBA were indeed to take the cash rate to 2.5% by year-end the market may see that as overly restrictive – so, traders will be watching to hear the RBA’s statement and the urgency to take the cash rate higher versus what’s priced into rates.

With the FOMC meeting also due out on Thursday (4:00am AEST) it promises to be a lively week in FX markets – so see our thoughts on trading the RBA meeting and how to position exposures from a risk perspective. Trade the possibilities with Pepperstone.

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