Michele Bullock, the Governor of the RBA, recently talked about inflation in an interview. The executive stated that inflation in Australia is expected to rise. However, it is too early to decide how it will affect the impact on interest rate settings.
This was Bullock’s first appearance before the Senate after becoming governor a month ago. The governor stated that the quarterly inflation figures recorded in September were a bit higher than the central bank had initially predicted.
Even then, the outcome was pretty close to what the reserve bank had expected. Bullock added that even though service inflation is declining, it is still higher than the comfort level with sturdy resistance.
A week before this appearance, Bullock talked about the RBA not hesitating to raise the cash rate. The governor said this could happen if the current inflation outlook had a material upward revision.
The senators, Nick McKim and Jane Hume were among the few who pushed Bullock to talk about the CPI figures. The RBA governor dropped a non-committal statement in response, stating that she wouldn’t say one way or the other.
RBA is looking at the inflation’s persistent parts. The central bank is assessing whether it will drop in the future, added Bullock.
As expected, this statement sent mixed signals to forex traders. Even the top forex signal providers in Australia have been pushing mixed predictions after the statement.
Westpac recently joined the big three banks to predict that the RBA would raise its crash rate at the Melbourne Cup day meeting. The National Australia Bank had been predicting the same for several months. The Commonwealth Bank also joined the movement this week.
Given the current market conditions and predictions, forex traders have boiled their options down to three scenarios.
Scenario 1: Short AUD/USD
This situation befits forex traders who believe that the Reserve Bank of Australia will hold off raising interest rates in the future.
The sole option for such traders is to short AUD/USD. It would mean that these traders would sell AUD and buy USD in anticipation of the Australian dollar weakening against the US dollar.
Scenario 2: Long AUD/USD
This situation befits traders who believe that the Reserve Bank of Australia is likely to raise interest rates in the future.
The only option for these traders will be long AUD/USD. It would involve the traders buying AUD and selling USD, anticipating the Australian dollar strengthening against the US dollar.
Scenario 3: USD/AUD options
This situation befits traders who are unsure of how the RBA will proceed. Although these traders are unsure about the situation, they should consider buying USD/AUD options. It will allow them to buy US dollars at a specified price on a specified date.
While there is no certainty of how the RBA’s interest decisions will affect USD/AUD, owning some options is better than sitting still.
However, traders should always remember that the forex market is volatile and unpredictable. Before making the final call, the traders must conduct their own research and understand risk management.
While Bullock discussed the tricky financial situation brewing in Australia in length, her statement on interest rates ended up sending mixed signals to forex traders. She stated that the RBA is looking at inflation’s persistent parts, and no statement, saying one way or another, can be released. Shortly after the pronouncement, the big four banks joined the consensus of the RBA on raising the crash rate in an upcoming meeting.
As for the forex traders, the majority seem unsure about what to do. Therefore, the most sensible choice for the trades seems to be buying USD/AUD options. It will give them the chance to get USD at a specific price at a specific time.