AUD/USD setting up to experience heightened vol

One of the currencies that benefited the most by the sell-off in the US Dollar was the Aussie, emboldened not only by a stronger-than-expected CPI reading, but also by a massive nearly 10% outlier rise in Iron ore, coupled with the convergence of global equities higher and a strong Yuan. The Aussie is setting up to experience heightened vol above its historical standards near term. On one hand, vol emanating from the US-China trade negotiations this week will be key. But equally important is the update in monetary policies by the RBA when they meet next week after its holiday period. The clear negative feedback loop into the real Aussie economy from lower house prices has become more evident, which means the chances of a rate cut have gone up heading into Q2/Q3 ’19. The market is pricing over 70% chances of a cut in the next 12 months, which makes you wonder to what extent the market can justify further rises in the currency in anticipation of a potential Central Bank monetary policy divergence play in coming months. We’ll get more clarity next week.