Investors are expecting a strong year for the stock market in 2015.
Global growth is likely to remain around 3.5%, ranging from 1-1.5% in the Eurozone and Japan, 3.5% in the US and China at 7%, global interest rates are expected to remain low and the next global recession (according to the prevailing cyclical pattern) may not be experienced until later in the decade.
In Australia double digit capital returns are forecast in 2015. The ASX200 is anticipated to reach 6000 by years end, interest rates are at 50 year lows, commodity prices are falling (including oil which could conceivable now fall to $US40/barrel) and the AUD could slip to just US69¢ over the year.
Administered through monetary policy, the benchmark interest rate (also known as the official cash rate) in Australia is currently 2.25 percent – its lowest level in over 50 years. Reported by the Reserve Bank of Australia at 2.30pm after each Board meeting, interest rates in Australia averaged 5.13 percent from 1990 until 2015, reaching an all-time high of 17.50 percent in January of 1990 and the record low level of 2.25 percent in February 2015. Forecasters predict interest rates to fall to 2 percent by the years end.
Australians have seen the value of the AUD (against the USD) loose almost 18 percent over the past 6 months. Falling to a multi-year low of US76.60¢ recently (down from US110¢ in mid 2011 and just US50¢ in 2001), leading economists expects the dollar to be worth less than US87¢ by December 31, with most suggesting it will be trading at (or around) US77¢ by the end of 2015.
Interest Rates and the AUD
Typically speaking, when interest rates rise, the AUD tends to appreciate. This is because higher interest rates decrease AUD supply and increase demand. Conversely, when interest rates fall, the AUD depreciates with supply increasing and AUD demand decreasing.
The RBA uses its monthly board meeting to make interest rate announcements. For binary options traders in 2015, trading interest rate announcements, because of their current high profile, provides both short and long term high probability trading opportunities.
Buy the Rumours, Sell the News
Scheduled on all economic calendar’s, short term binary options traders can trade a strategy known as ‘buy the rumours, sell the news’ on RBA Interest (Cash) Rate announcements. Relying on short-term reactions to drive the market in a particular direction, a binary options trader should review historical price data to predict how RBA announcements can affect AUD prices.
A trader will ‘buy on the rumour’ meaning they treat forecasts issued by economists or by the RBA Rate Indicator as though the event has occurred by factoring in the forecast into price. To do this, the trader creates a large price bar (bearish or bullish depending on sentiment) on the outcome that the news is anticipated to produce. ‘Selling on the news’ relates to the period of time after the announcement has occurred. Even when the news has matched the forecast, after reaching recent new bullish highs (or bearish lows), price will typically return to pre-announcement levels, for a short period (before returning to announcement higher/lower price levels).
Depending on whether sentiment considers interest rates will rise, fall or remain on hold, is dependent on the either bullish or bearish view a binary options trader should have on the AUD and the short term placement of either a call or a put trade.
Because binary options traders are not concerned with how much an asset moves in price; only the direction, an experienced binary options trader after carefully evaluating previous interest rate decisions and the effect on the AUD can view the announcement as a high probability trade.
Long Term View of Interest Rates and AUD
A profitable binary options strategy does not have to involve difficult technical analysis. Interest rates in Australia are at 50 year lows with forecasters predicting the official cash rate level to fall to 2 percent by the end of 2015. According to the laws of supply and demand, the AUD has fallen almost 20 percent in the 6-12 months confirming the prophesized theory that when interest rates fall, the AUD depreciates. That is, AUD supply has increased and AUD demand has decreased.
For long term binary options traders in 2015, Put trade on the AUD at US87¢ by December 31, would be considered a high probability opportunity for profit which is confirmed by the low interest rate levels currently being experienced.
Responsible money management ensures that the losses don’t mitigate the profits.