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Nerves of Steel: Forex Markets

Posted in Forex Trading | Traders' Delusions, Submitted by Trading Critic on Wed, 2006-08-02 13:33.
A Chart of the Australian Dollar (AUD/USD) reaction to the 0.25 percent interest rate to 6 percent announced by the RBA 2-8-06

This morning I was looking at the reaction of the Aussie dollar as a result of the Reserve Bank of Australia (RBA) released the outcome of their deliberations yesterday. The interest rate was scheduled to be announced at 0930 Sydney time so I was in front of my laptop by 0920 watching the screen (And putting on a trade). As you can see from the minute chart above leading up to the announcement, trading was thin in the minutes leading up to the announcement. The gold star marks 0930 hours. Everyone was 99 percent sure that the Australian interest rates will rise by 0.25 percent to 6 percent. And the interest rate did rise. So what does a forex traders' mind run through in a trade like this one?

A Quick Forex Overview

If you aren't aware of foreign currency movements and the reasons why they move here is a quick overview. I was looking at the Australian (Aussie) dollar price with respect to the US dollar price: i.e. the AUD/USD currency pair. Now, last week, the RBA announced 4 percent inflation, which is way above the Bank's target rate. The market saw this a sure bet that the interest rate would rise the following week (the event today). So the market priced in the interest rate move and the dollar spiked from around the 0.7500 level all the way to just above 0.7670. Some 170 pips. Which is a huge spike in the dollar if you look at the weekly charts. Anyway, fast forward to today. Yesterday during American trade, the dollar actually hit 0.7600, but by the time the Aussie market opened this morning the dollar recovered from the "profit taking" (the reason the media always gives when the market spikes and then falls the following day/week) to open at around 0.7650. When I previously stated "thin trade" this is shown by the sideways movement of the dollar together with the lack of coloured candles. Finally, a country's currency usually reacts positively to any prospect or actual interest rate increase. And that's what some traders call "trading the news."

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