Australian Dollar Tuesday

ALL EYES ON RBA - I am writing this report late Monday, ahead of the early Tuesday RBA rate decision. Clearly, we are going to get some volatility from this event risk. The market is basically split on the outcome, and it will certainly be interesting to see if Mr. Stevens follows up his most recent easing with another cut to record lows of 2.00%. Given recent data which has shown disappointing employment, Q4 capex, retail sales, and PMIs, along with softer CPI and TD-MI inflation expectations, there is a very strong case to be made for a Tuesday cut. A couple of major banks have already come out with their calls for a cut on Tuesday and even more cuts to come. As such, there is still potential downside for the Australian Dollar ahead and there will be opportunity that presents with this volatility. I would say to wait for the rate decision and then look to assess where the trades are. I am already long AUDNZD and realize there could be another break to a record low below 1.0300 on the news. And yet, as I have repeatedly said, this is a longer-term trade, and whatever the downside ahead, it should pale in comparison to the upside projected over the coming months.

EVEN IF IT CUTS - You see, the most important thing to remember is that this is not about the RBA or Aussie weakness. The RBA is cutting rates and the Australian Dollar is weakening on account of broader global macro economics. This is not an Australia event. This is a global event. Australia just happens to be the next country with a central bank rate decision. But if Australia cuts, other central banks will follow and cut again, and in the end, the central banks that fall behind in the accommodative cycle will be the ones that suffer the most. I believe the RBNZ is one such central bank at risk for troubles down the road. Too much of the New Zealand Dollar's value is held on external non-New Zealand related factors. The New Zealand Dollar is a risk correlated currency and with stock markets on the verge of a major capitulation and with the Fed about to reverse policy, this should open a major risk liquidation and in turn weigh tremendously on the correlated Kiwi. So while Aussie may look exposed right now, Kiwi will be the one that gets hit harder in the months ahead. I am long 1.0355 right now. If you aren't in this trade and see a sharp sell-off into the 1.0200's post RBA, I would strongly urge you to consider the long AUDNZD play. It's a busy week ahead with more central banks and Friday NFPs to come. So strap yourselves in!