RBA Cuts Rates to 3.25%: Reaction

RBA cuts its reference rate by 25 basis points to 3.25%, catching majority of traders/analysts off guard.  Only 9 out of 28 analysts surveyed by Bloomberg  predicted the cut.

The immediate reaction of AUD/USD is predictably lower; price dropped 50 pips immediately from 1.037 to 1.032. Currently we're edging lower but price appears to be supported by 1.03 round figure.

2nd October 2012 – Expected Cut: None

With prices trading below Monday's low, will this unexpected rate cut push AUD/USD down further? Let us take a look at the previous times where RBA decrease its reference rate.

5th June 2012 – Expected Cut: 25 bps

1st May 2012 – Expected Cut: 25 bps

5th Dec 2011 – Expected Cut: 25 bps

31st Oct 2011 – Expected Cut 25 bps

Taking a macro view:

AUD/USD Daily (line representing rate cut by RBA)

There doesn't seem to be any strong long term correlation between AUD/USD and rates cut. Even the short-term reaction produce mixed reaction, with 31st Oct 2011 and 5th Dec 2011 showing different reactions despite both rate cuts being expected by analysts.

S&P 500 Daily

Comparing with S&P 500, one will notice that AUD/USD tracks this graph better than rates cuts. Hence the question of whether AUD/USD will move lower following RBA's cut could potentially be better answered by asking: Where will S&P 500 and broad risk appetite move from here out?

At the risk of sounding like a broken record, this new development does not really change the overall trend of AUD/USD. Market will still be looking at Spain and also Greece for bullish/bearish direction.