By: Andrew Keene
Last week, the Australian dollar rallied on speculation that the Reserve Bank of Australia would end it's cycle of interest rate reduction. Prompted by the best payroll report in nearly 13 years, the currency shot to a one-month high. Two weeks prior, the Reserve Bank Board announced it had no plans to lower borrowing rates below the current 3.0%. The central bank undertook significant easing measures in 2012 and the second half of 2011, cutting rates by 1.75 percentage points in the period.
The cuts were aimed at a rebalancing of the domestic economy. The mining sector, primarily located in the north and western region, is most sensitive to demand for nearby China, Australia's largest trading partner. While this sector has performed very well, builders and manufacturers to the south and east struggled and led to interest rate easing from the usually conservative RBA.
With the unemployment rate holding at 5.4%, the 71,500 jump in payrolls is attributed to a 65% increase Australia's work force participation rate. This jobs growth occurred in the south and eastern regions as well, an encouraging sign as officials are targeting more balanced regional economies.
Technically, the AUD has crossed the important 1.04 resistance level and could be poised to rally past 1.05.
My Trade: Buy the FXA June 105-106 Call Spread for $0.35
Risk: $35 per a lot
Reward: $65 per 1 lot
Breakeven: $105.35
Greeks of this Trade:
Delta: Long
Gamma: Long
Vega: Long
Theta: Short