Reserve Bank of Australia became the first major central bank to raise interest rates. The benchmark cash rate was bumped from 50 year low of 3.00% to 3.25%. Most market observers call the move “surprising”, which is not necessarily the case. Some inflationary pressures were reported in Australian economy some time ago. Combined with the fastest recovery among western economies, move by RBA shouldn’t really have shocked anybody. Only when put in the light of latest G-20 and G-7 meetings, could this action raise eyebrows. Representatives of participating nations agreed in principle to leave their stimulus packages in place, for the time being. Well, apparently, Australian authorities decide it was time to start withdrawing excess liquidity, in order to avoid other inflationary problems later.

This is bad news for US Dollar, which had already been falling against all higher yielding currencies. New carry trade, in which USD is providing cheap money, will only accelerate from here.  FED said and over that is willing to keep rates low for extended period of time, providing enormous pool for speculative purposes. Much like Japan did for last two decades. Interest rates differentials are not as big as they used to be couple of years ago, but if other countries decide to follow RBA example, they will increase, making it more and more attractive to short USD in search of easy returns. Will New Zealand and Canada be next countries to raise the rates?

Australian Dollar responded strongly to the news, surging against all currencies, including the Euro. Yesterday’s post, about Sunday’s trade included possible trade in EUR-AUD. At the time I overlooked the fact of RBA meeting. Few hours later I checked the event calendar and noticed what was scheduled. Since order had not been filled at the time, I closed it. My aversion of trading before central banks announcements has been expressed here many times. Had the trade been under way, I would have left it alone, with a firm stop. As it was- no trade. But there is one now.

Just minutes ago I went long EUR-AUD at 1.6531. Intermediate, 4H chart, suggests support around 1.6500. This doesn’t have to major turning point, we never know that, but chances are good for a reaction at previous low, especially since they are not too far apart. Objective is 180 pips, while risks are small. I’m not setting hard stop for now, but rather check the price every 4 hours, as new candles are formed. Perhaps 60 pips or so are at stake here. It all depends on how price develops.
At the end of yesterday’s post I also mentioned a long trade in CAD-CHF. This one worked.

Hourly chart was used for a breakout set up at 0.9645, with a modest target of 50 pips. Price reached it about an hour ago. Nice little trade.
This is  not something I can say about EUR-NZD, originally described in the Forex price action. Buy order had been filled few days ago, only to be stopped out today.

New Zealand Dollar gained strength, probably a “sympathy move” with AUD(who coined that phrase?). This cross moved under most recent low on the 4H chart, effectively closing the trade for 225 pips loss, making it a third consecutive time that a reversal for EUR-NZD has failed on this magnitude chart. It is entirely possible next one will fail also, but probabilities are increasing for a more meaningful move up next time reversal starts. That’s why new buy order is placed at 2.0490.

One more Euro cross to look at, this one is EUR-JPY. Yen is in peculiar spot right now, consolidating and looking for its own stimulus to go either way. I’m using 4H chart here and seeking upside breakout. Buy order is placed at 132.10, with a large objective of 200-250 pips. Not fast resolution is expected , this can easily take few days or even a week. Any sooner would be a bonus, assuming that’s what happens in the first place.

Mike K.