Profits taken quickly on long AUD bets, ASX futures (+13) recover from 'hold' sell-off, WTI oil price hits the top of its recent range but spread narrows

Intraday traders took advantage of local volatility in Australia yesterday, with the ASX 200 running to 5,981.70 before selling off to 5,895.80 following the RBA's 'hold' rate decision and then closing at a 5,925.97. It really was a trader's market, there was no sense of optimism or pessimism relating to the RBA's decision to hold for the moment and there were not data releases that fuelled the volatility - it was simply a day that was dominated by big bets.

Today's first chart shows the AUDUSD currency pair rallying by more than 100 pips (or one cent) as those hoping for a rate cut unwound their short positions and followed the reversal in the cash rate markets, which had heavily priced in a cut to the cash rate target. As logic would dictate, however, the market will remain convinced that a cut will emerge and thus the profit-taking occurred quickly and we've now returned to a level of US$0.7630, which is not too dissimilar to where the Aussie was trading prior to yesterday's announcement. Yesterday's RBA decision and the accompanying statement has not shifted the mood of traders, who simply pushed their bets out to the 5 May meeting - we're now seeing a 76% chance of a cut to 2.00%. Looking forward to May, I think the Aussie trade will really be to buy the sell-off, assuming a cut is announced. But I'm not sure how much of a sell-off there will be, given how convinced traders will be of the cut - it'll be fairly well priced in. My advice to trade 'with the decision' yesterday from the European open would have resulted in a failed trade, given the RBA's statement gave the market no reason to believe a cut won't happen in May.

Today's second chart shows the ASX 200 cash index CFD, which got very excited coming into the rate decision. Traders took the index well beyond the overseas lead that accumulated over the Easter break and they were punished for it when the RBA kept rates where they were. But again, the market quickly shook out the intra-day bets and drifted higher as the inevitability of a rate cut set in.

A report from the US Energy Information Administration called for a production peak in the US over the next two months, before predicting falling production from June to September. This spiked the price of WTI crude, but not quite to the intraday highs of this year. I would remain a seller in this market despite the signs that are showing slowing output from the US as the price hinders production. Despite Israel's protests, the market is assuming a nuclear accord with Iran will conclude and this would help lift the oil sanctions that have starved the country of its export revenue. This would--not immediately--worsen the oversupply story in oil markets and could be another factor that would keep a foot on oil markets. Nonetheless, the Iranian supply story will affect Brent crude prices more than WTI and thus anyone who followed my spread-narrowing suggestion over the last few weeks would have done well. Today's third chart shows that falling inventory expectations (bullish for WTI) combined with similar or worsening supply story in the Middle East (bearish for Brent) has narrowed the spread in price between the two benchmarks, rewarding those who took a market-neutral view from previous posts. Members can feel free to take profits on this trade or continue to hold, speculating that the trend will continue.


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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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