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How to Trade the Aussie After the Rate Cut

Tuesday, 1 May 2012 | 2:58 PM ET
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Australia's central bank surprised the market with the size of its overnight interest rate cut. Here's what could be next.

When the Reserve Bank of Australia cut interest rates by 50 basis points, more than investors expected, the Australian dollar, not surprisingly, slumped. Is the move over?

Hardly, says Todd Gordon, co-head of research and trading at Aspen Trading Group. Australia "has got subtrend CPI growth, housing sector's a problem, I think there's more cuts to go in the Australian economy, and that's going to weigh on the Australian dollar."

How to Trade Currencies
Todd Gordon, Aspen Trading Group discusses the current trade on the U.S. and Australian Dollar.

The U.S. dollar, meanwhile, is in a decent position, Gordon says.

He notes that the dollar strengthened along with stocks on a positive manufacturing-activity report today, contrary to their longtime pattern. In his view, "as the U.S. economy powers ahead, you're going to see the dollar strengthen. I think with Australia continuing to cut rates, that's going to pressure the Aussie."

He wants to enter the trade at 1.0350 with a stop at 1.0500 and a target of 1.0000.

Brian Kelly of Shelter Harbor Capital is ambivalent on the trade. In his view, while the Australian dollar weakened on the rate cut, it didn't reach a significant new level.

But Gordon argues that the Australian dollar was the biggest loser of the day.

You can watch the debate on the video.

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Learn more: The essential vocabulary for currency trading is on Key Currency Terms. Top currency strategies are broken down for you in Currency Class.

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