Trading around Christmas time generally gives you one of two scenarios.

The market can be boring and sideways, with traders taking a break over Christmas, or it can give you a really strong move heading into January.

WD Gann wrote that early January was an important time to watch for turns in the market. If you look back over any market, you will often see major moves start or finish early in January. This can be a great way to finish the year, with a nice Christmas bonus from the market!

How do you know whether you will get a good move or a boring, sideways market?

The answer lies with time analysis, which is beyond the scope of this article. However, those of you who have studied Gann would know that if your time analysis is showing you an early January date, you can be pretty confident you will see a turn.

My time analysis is telling me to watch for a turn in the first week of December on the US Dollar/Japanese Yen (FXUSJY in ProfitSource), running into another turn around the 5th or 6th of January, 2009.

Chart 1 below shows the current market action on the Dollar/Yen.

Chart 1

click to enlarge

After a very tradable move down from the August 15 high, the Dollar is trading in somewhat of a violent sideways pattern.

With moves like these, it can be difficult to know whether to expect a top or a bottom if we have a turning date approaching.

In this case, I am watching for a top around the 100.80 level. This was the 50% Retracement Level of the run down, and would give us a double top with the November 4 swing high, as shown in Chart 2 below.

Chart 2

click to enlarge

I am yet to meet anyone who can call every turn in the market, every time. Sometimes, it just doesn’t work out. David Bowden once said “when it comes to trading, the only thing you need to know about God is that you’re not him!” It’s important to remember that – if the market doesn’t give us a tradable signal on our pressure date, we simply wait for the next date.

Many people would prefer not to hold positions over Christmas, as this is traditionally a period of rest, and that’s fine – you can always come back early in the New Year and look to trade OUT of the early January date.

However if we see a Double Top come in early December, there is a very good chance we will see a 1000+ point fall in the Dollar/Yen, into a January low. With the exciting leverage of the FX market, a 1000 point fall equates to $US1000 for every $US100 US margin tied up in the trade.

Capital Flows ,Where the money goes ?

But honestly, that’s only part of it. The other reason there is always at least one currency rising is because of capital flows. As a currency trader, you’re constantly watching where capital is flowing, so you know where traders are dumping their money.

Every time markets suffer around the world, there’s always a line-up of investors ready to sell-off their positions.

Each time, those investment funds have to go somewhere. Even if that’s just back to cash – which pushes a handful of currencies higher. That’s exactly what happened in 2008. As investors ran from stocks, bonds and even CDs, certain currencies rose.

However, not all currencies (or markets) are created equal.

The US Dollar Index (USDX) has been now bouncing back by more than 18% since the bottom posted at mid-July. This low level was identified as the second leg of a “double-bottom” pattern which is a strong basis for a rebound (see on the daily chart). This is what happened and now the Dollar Index has already retraced 23.6% of the long-term bearish trend started in July 2001 and ended then at mid-July 2008.

Click To Enlarge

This long-term bearish trend (between points A and B on the weekly chart) drove the Dollar Index roughly from 125 to 72 therefore a loss in value of more than 42%. On the medium-term, the target is likely to be the resistance line plot just below the 38.2% Fibonacci retracement. It’s a previous high level where a “double-top” occurred (points C and D) that generated the second phase of the bearish trend, between 2006 and July 2008.

On the short-term, let’s use a system based a on multi-dimension oscillator to anticipate the price action. We use the Chande Momentum Oscillator (CMO).

Click To Enlarge

The CMO can be used to measure several conditions.

Overbought/oversold: the primary method of interpreting the CMO is looking for extreme overbought and oversold conditions. As a general rule, overbought levels are quantified at +50 and the oversold levels at -50. At +50, up-day momentum is three times the down-day momentum. Likewise, at -50, down-day momentum is three times the up-day momentum. Basically, these levels correspond to the 70/30 levels on the RSI indicator.

Trendiness: the CMO can also be used to measure the degree to which a security is trending. The higher the CMO, the stronger the trend. Low values of the CMO show a security in a sideways trading range.

Divergence: as is often done with other momentum indicators, divergences occur when the indicator does not confirm new highs or new lows posted by the price action.

Other: although not specifically dedicated to patterns recognition, the CMO may be also used to identify chart formations, failure swings, and support/resistance levels.

If we establish overbought/oversold entry and exit rules by plotting a moving average trigger line on the CMO, therefore alerts are triggered when the CMO crosses its 9-period moving average after being in an overbought or oversold condition.

It’s a short-term basic system that typically well identifies inflexion points.

Seven separate assets currently maintain an 85% correlation (or better) with the S&P 500 over the last six months.

This correlated group includes Reuters/Jefferies CRB Index, emerging-market bond spreads, and not surprisingly, the euro. I’ve been talking about the tight correlation between currencies and stocks for some time.

My reason is simple: As risk ebbs and flows, the amount of traders buying U.S. dollars also ebbs and flows - only in an opposite direction.

So that means, when the S&P 500 tested new lows and bounced sharply, the U.S. dollar did the opposite - the dollar tested new highs and fell back sharply. We watched this happen this past week. Then on Thursday stocks collapsed again. Stocks tumbled to new lows not seen since 2003, and dragged down the euro right alongside. Of course, the U.S. dollar index broke out to a new high.

These tight correlations often are simply risk, ebbing and flowing. But maybe we should look deeper to understand the true driving forces behind recent trends. If you look closer, you can see why these correlations are more dollar-bullish than you might think.

What “Tight Coupling” Really Means

Over time, the market process can consistently produce extremely efficient interaction among human beings in the marketplace, in the business place and in life.

I try to make it sound simple. I try to boil it down to the big ideas. But really the entire process and all that goes into it is extremely complex.

I’m in the middle of a book by Richard Bookstaber titled Demon of Our Own Design. He’s devoted an entire chapter to an idea known as “tight coupling.”

That idea alone explains the correlations I just mentioned. Tight coupling also explains why the financial system crumbled, why the global economy is sinking, and why the U.S. dollar is back in vogue.

Tight coupling is the design and labor that goes into building a house. Tight coupling is how rock climbers scale a mountain-side. Tight coupling is an idea that helps to explain the detailed processes that go into complex, everyday functions. It also explains why disruptions of these detailed processes can happen.

Tight coupling exists throughout the financial markets that currency traders stress over nearly every single day.

A good example would be the recent subprime-mortgage backed securities fiasco. Before the entire credit system went boom, there were quite a few things strung tightly together. These things supported the trend of issuing subprime mortgages, bundling them up with other assets and selling them to investors.

But then home prices started falling. Suddenly borrowers couldn’t afford loans. Bundled loans became less attractive. The market for this newly created product froze up. Losses started piling up for investors in these bundled assets.

And then investors isolated from these assets began losing on their investments. This happened as the tightly coupled financial industry became unwound and asset values of good assets and bad began deteriorating together.

‘Propagate’ is a good word here - it means to cause to spread out and affect a greater number. Bookstaber used this word on occasion to explain how market participants add to the complexity of the financial system, and how that can lead to accidents which can trigger a vicious downward spiral of asset prices.

And that’s all well and good. Even if you’ve not yet grasped the idea of tight coupling yet, you understand what’s happened with the subprime market by now. You also know that relatively solid assets have been impacted once subprime derivative participants, and the market, were no longer able to handle the complexity of what they created.

If history is our teacher, it tells us that the dollar does respond to any crisis for a few months or so typically after the economy hits another rough patch. However, afterwards, it reverts back to the trend at hand.

If it went into the crisis in a downtrend, then it goes back into it again. And if it went into the crisis in an uptrend, then it tends to revert back to that uptrend too.

If history is any indication, then it’s very possible the dollar will simply continue the downtrend it’s been in for the past six years: crisis or no crisis.

But due to additional factors - namely the dollar being at a 30-year low point at the beginning of this predicament - I don’t think it’s going to be a very clear downtrend. At least not in the short-term.

I see the dollar ‘ranging’ (Forex speak for going nowhere at all) over the next few years, much like it did after the S&L crisis, as you can see below.

Bank Failures Mean the Bumpy Ride Will Continue

This is what I believe may happen this time as well. However, on a year-over-year basis, it won’t feel like a wide range. It will feel like very strong, sharp uptrends. It’s only when you look back on this era over 10-15 years that you may see the dollar ranged for several years after - what shall we call it? Perhaps - “The Bailout Crisis of 2008.”

So as traders all around the globe watch their bottom lines bottom out and their hedge funds blow-up, I’m flat-out loving this market.

Why? I have a secret weapon that lets me profit when markets are sinking, while my stock trading buddies can barely stay afloat with their stocks.

What’s that secret weapon? The Japanese yen. You see, when volatility increases in the markets and stock traders lose their shirts, their loss is my gain. The Japanese yen experiences an uptrend when almost every other asset class (even commodities) is headed downhill.

At times like these, I can pair the yen with almost any currency in the foreign-exchange market and I’ll win. I know the yen thrives off of volatility, so one of my buddies’ strongest tools works even better for me during bear markets.

Stock traders all over the country look to the VIX (Volatility Index) to gauge when the stock market may bottom. They wait until the VIX rises to an extreme level and then they go in and buy. However, I watch the VIX heading higher and I know it’s giving my yen trades another boost.

Then when the VIX appears to peak, and these stock traders are just beginning to make some headway in their trades; all I have to do is reverse my yen trade and I’m still making a killing the whole time. If they only knew it was so easy…

Take a look at the VIX in the chart below, and the Japanese yen price right above it. When the VIX hits extreme levels (above 30 but especially around 35 or higher), the yen starts to peak. At that time, I just reverse my trade and start shorting the yen.

The VIX and the Yen…Traveling Buddies!

As a currency trader, you can buy or short the yen based on what you see using the VIX, their so-called “stock tool.” If you’re a stock trader and you understand the VIX, then you also understand the yen whether you know it or not.

As you can see above, the yen’s run may be almost over because the VIX is showing an extreme reading (i.e. it’s soaring higher). So it may be time to reverse your Japanese yen trades.

Secret Weapon #2: Collect Daily “Dividends” from the Currency Market

But there’s one secret that would REALLY push my stock buddies over the edge if they knew about it. It’s one I use in “up” markets, when stocks are also doing well

Most traders know the S&P 500 hasn’t gone anywhere for a number of years. However, once you take into account these companies’ dividends, then you could have an overall gain even while stocks stay flat.
However, these stocks only pay out dividends on a quarterly basis, while currencies pay out interest on a daily basis. Yes, you read that right…

It’s like getting a dividend daily.

So I have 365 opportunities a year to profit, while my stock buddies get four. If they only knew…

Secret Weapon #3: No Commissions, So There’s Less Fees in Currencies

The third advantage I have over stock traders is my stock buddies have to pay a spread AND a commission for each stock trade, while I ONLY have to pay the spread.

And I pay a smaller spread than they do because I control more currency with less money down and because the currency market has more volume which leads to tighter spreads.

So while my stock buddies are trading in this bear market, losing money on their positions AND paying commissions along the way, I’m earning profits now and paying less in fees.

Let’s say my stock trading buddies and I place the same number of trades each year. My stock buddies pay a measly US$7 per trade (even though many firms charge more). If we both made only 10 trades each month, we’d both have 120 trades over the course of a year.

Now remember that stock traders are charged twice on each trade (when they buy and when they sell). So over the course of the year, my buddies must pay 240 different commissions, costing US$7 each. That’s US$1,680 in commissions. That doesn’t even count how much they also pay in spreads.

What do I pay in commissions for completing those same 120 trades? Nothing! I only pay my much smaller spread all year long.

My stock buddies have to earn that much more in profits before they even break even. So obviously, the deck is stacked in my favor. If they only knew…

You now know my three secret weapons that give me an edge in the currency markets.

Once you add currency plays to your portfolio, you’ll quickly discover currencies have an advantage over several other markets. For starters, currencies can produce large gains in a relatively short amount of time, unlike bonds. Also, certain currencies perform well during both recessionary and recovery periods, as I mentioned.

In fact, we can be smack dab in the middle of a recession and certain currencies will still perform well. Don’t believe me? Look at the markets right now.

Usually the savvy investors switch to commodities when stocks are falling. Earlier this year, commodity investors made a killing when they dropped their stocks for long-term commodities. However, those same investors got slaughtered two months ago when commodities plummeted. As those investors learned, there are times in the economic cycle when BOTH stocks AND commodities are going down - and we’re in that time RIGHT NOW!

So what’s left? How do you buffer the volatility and help diminish draw downs to your portfolio in times like these? You buy the currencies that perform well during bear markets or more specifically low-yielding currencies like the Japanese yen and Swiss franc.

Remember: Since currencies are always traded in pairs, you just have to look to the currencies that might not have seemed worthwhile during times of growth and expansion. Currencies like the yen - whose low interest rates encourage institutions to borrow it - and the Swiss franc are excellent ideas in markets like this one

Currency traders like to say that currencies are always in a “bull market.” That’s partially true. What’s closer to the truth is you can always find at least one currency that’s outperforming the stock, commodity and bond markets at any given time.

For example, over the past weekend Lehman’s, AIG’s and Merrill Lynch’s troubles took a bite out of the dollar’s performance. But while the dollar dipped, two currencies continued to rise - including the Japanese yen and Swiss franc.

This is pretty typical of currencies during this type of market…

Traditionally, there are currencies that prosper during tough times, even during recessions and depressions. These “recessionary” currencies are beaten down during recovery periods.

Traders scorn these currencies when other markets are soaring because no one wants their “paltry interest” and smaller growth, when they can get higher returns elsewhere.

However, when markets start to fall, currency traders grab these currencies with both hands to save their portfolios. That’s exactly what happened this weekend. The so-called “weakest currencies” paying paltry interest rose, while the high-yielding currencies like the Australian and New Zealand dollar sank

To recap: During stock bull markets, currency investors are busy buying up high-yielding currencies and continually selling low interest yielding currencies. But when bad times hit, currency investors quickly trade in their high-yielding currencies for the safety of the ‘beaten-down dog’ currencies like the Japanese yen and Swiss franc.

NEW YORK - Wall Street shares zigzagged to a mixed finish on Friday in a market dragged around by reports and speculation about the fate of two troubled financial firms, Lehman Brothers and Washington Mutual.
In a volatile session that saw gains and losses reverse several times, the Dow Jones Industrial Average ended with a modest decline of 11.72 points, or 0.10 per cent, at 11,421.99.
The tech-heavy Nasdaq rose 3.05 points, or 0.14 per cent, to 2,261.27 while the broad-market Standard & Poor’s 500 index managed a gain of 2.65 points, or 0.21 per cent, to 1,251.70.

LONDON - European stocks closed higher on Friday, with investors betting that the US authorities will ensure that failing investment bank Lehman Brothers finds a saviour and ease the pressure on the banking sector.
In London, the FTSE 100 index was up 98.3 points, or 1.85 per cent, to 5,416.70 points.

FRANKFURT - Germany’s DAX 30 rose 55.99 points, or 0.91 per cent, to 6,234.89.

PARIS - France’s CAC 40 jumped 83.59 points, or 1.97 per cent, to 4,332.66 points.

TOKYO - The Tokyo Stock Exchange’s benchmark Nikkei-225 index closed up 112.26 points, or 0.93 per cent, to 12,214.76 ahead of a three-day weekend in Japan.

HONG KONG - Hong Kong share prices closed down 0.18 per cent on Friday, as weakness in Chinese banks offset earlier gains in property developers and energy firms.
The benchmark Hang Seng Index plunged 35.82 points to 19,352.90

WELLINGTON - The New Zealand share market rose to end the week, the benchmark NZSX-50 index closing up 28.15 points, or 0.844 per cent, at 3361.68.

SYDNEY - Australian markets have received a mixed lead from Wall Street, although the price of oil fell again in a special trading session overnight whilst gold and silver rose.
At 0722 AEST, the Sydney Futures Exchange’s September Share Price Index contract was 50 points higher, or 1.02 per cent, at 4,975.
In news today, the Australian Bureau of Statistics will release dwelling unit commencements data for June.
Reserve Bank of New Zealand assistant governor Dr John McDermott speaks at an Australian Business Economists lunch on “Monetary Policy Issues in New Zealand”.
Base metals and uranium explorer Aluminex Resources Ltd is to list on the Australian securities exchange.
On Friday, the benchmark S&P/ASX200 was up 89.5 points, or 1.86 per cent, to 4,903.8, while the broader All Ordinaries added 85.6 points, or 1.76 per cent to 4,957.1.

NYMEX

In energy trading on Friday, crude oil briefly fell below $100 a barrel despite threats to Gulf energy supplies from Hurricane Ike, suggesting traders still believe a soft economy will keep driving down demand.
Light, sweet crude for October delivery ended Friday 31 cents higher at $101.18 a barrel, after briefly sinking to $99.99.
That was the first time oil traded below $100 since April 2.
In a special trading session on the NYMEX last night Australian time, crude oil fell to a six-month low and gasoline tumbled amid signs that refineries along the Gulf of Mexico coast will soon resume operations after escaping major damage from Hurricane Ike.
More than 20 per cent of the US’s oil refining capacity was shut, limiting fuel deliveries and prompting the Department of Energy to release 309,000 barrels from its strategic reserves. New York Mercantile Exchange electronic trading opened early today to allow traders to respond to Ike.
Crude oil for October delivery fell $2.18, or 2.2 per cent, to $99 a barrel at 4.26 pm (0626 AEST) on the Nymex. Futures touched $98.46, the lowest since February 26.
Prices are up 25 per cent from a year ago.
Gasoline for October delivery fell 10.86 cents, or 3.9 per cent, to $2.661 a gallon in New York.
Oil in New York has fallen 33 per cent from a record $147.27 a barrel on July 11 as high prices and slowing global economic growth reduce demand for fuels. Sales at US retailers dropped in August for a second straight month and July inventories at American businesses increased the most in four years, Commerce Department reports showed last week.

COMEX

Gold for December delivery rose $19 to settle at $764.50 an ounce on the New York Mercantile Exchange on Friday, after earlier rising to $770.50. It was gold’s first positive close in 10 days.
Other precious metals also traded higher Friday. December silver rose 24 cents to settle at $10.795 an ounce, while December copper gained 7.2 cents to settle at $3.194 a pound.

The Rate Cut That May Cost You Money
The latest news from the Australian Bureau of Statistics (ABS) was that the unemployment rate had fallen to 4.1% from 4.3% the previous month. These numbers were on a seasonally adjusted basis.

Source: ABS

The Reserve Bank of Australia (RBA) jumped too soon. That is one reaction after seeing the latest unemployment numbers from the ABS.

The other reaction is that the RBA has accounted for this because it wants to avoid putting the economy into recession. The argument would say it is not worrying from an inflation perspective either.

Consumers Expect Inflation Rate to Fall
At the same time the Melbourne Institute released its survey of consumer inflation expectations. It shows that consumers are feeling quite positive about the direction of inflation. The survey tells us consumers believe inflation will fall in September to 4.4%. We will wait to see how accurate this survey is. In the same survey 9.8% of the respondents thought the inflation rate would fall to below 3%, the RBA’s target level.

Let us suppose the great consumer has successfully predicted the inflation rate for the September quarter. The survey recorded 5.9% for July, 4.9% for August, and 4.4% for September. Yielding an average of 5%. This is still significantly above the RBA target band of 2-3%.

The ABS is due to release the September quarter CPI on 28th October. So, how did the Melbourne Institute survey perform in the previous quarter? The results were as follows. April 4.3%, May 5.2% and June 5.9% for an average of 5%. This was above the official figure for the June quarter of 4.5%.

We can’t extrapolate any further than to say that consumers overestimated inflation on average during the June quarter. It is possible they will do the same this quarter. The unknown quantity is what impact reporting of inflation expectations in the media has on the respondents.

Cost of Living Remains High
At the time when consumers were predicting inflation of 5.9% the media was full of stories about high petrol and food costs. Since then the price of petrol has moderated. Yet is still remains around $1.50 per litre, which is not that significantly lower than four months ago.

Because of this moderate decline in petrol costs there has been little comment in the press about it and therefore minimal commentary on the still high costs of living. Therefore, there is the reasonable prospect that consumers are being lulled into a false sense of low inflation and could be in for a shock when they realize their money isn’t worth quite as much as they thought.

We shouldn’t forget the unemployment numbers either. The RBA reduced interest rates this month because it believed that the economy was slowing. However, it did not want the economy slowing too much for fear of triggering a recession.

Although the RBA only made the decision this month, it had made it clear well in advance that an interest rate cut was on the cards. It is possible that Australian industry has pre-empted the RBA, anticipating the cut and hiring staff. The effect of this is to keep the labour market tight and potentially drive up wages and prices. Exactly the opposite of what the RBA is supposed to be striving for.

Boom and Bust
It could be argued the RBA’s intentions are admirable in trying to avert boom and bust cycles. The problem it now creates for itself is a continuous cycle of industry, the consumer and the RBA all trying to pre-empt each other’s actions.

In that context we were discussing the misfortunes of the Australian dollar during the last two months. But the same can be said for the stock market as well. During the current earnings season there has been a bit of a mixed bag with some showing excellent revenue and profits (BHP and Rio) while others have been woeful (Babcock & Brown).

At the moment, the outlook for a broad rise in the stockmarket doesn’t look good. Ever since the market topped out last October the S&P/ASX200 has continued to drift downwards, punctuated by false rallies on the back of over optimism.

But there is light at the end of the tunnel. The problem is that we can’t quite work out how long the tunnel is. There are positives that should ensure that Australia emerges from any economic downturn without too much agony.

As a resources led economy there is often talk that any downturn in the US economy will reduce demand for goods there, which will reduce demand for imports to the US from China which will reduce demand from China for Australia’s resources. Of course, this will have an impact but probably not to the degree that is feared.

Thanks to the massive demand for raw materials companies such as BHP Billiton, Rio Tinto and Fortescue Metals have been able to charge big premiums for their commodities. Any downturn in the US and Europe is bound to have some impact, however there is still ample room for Asian economies to grow without the need to rely on the US and Europe. Demand for Asian domestic consumption will be the next growth area as incomes rise and the standard of living rises with it.

Another insulator for Australia is the concentration of business in a small number of large companies. Many Australian sectors are in effect presided over by duopolies where the lack of major competition has allowed them to maintain healthy profit margins. The relevant smallness of the Australian economy makes it that much harder for new entrants on a large scale.

This allows them to maintain some of their margins without the fear of being undercut by competitors. And when competitors do come into the market they have to work fast in order to build up market share. A tough ask when consumers are comfortable the same brand they have used for years.

So what does that mean as investors? It really means that with the market having fallen so far since last year, the opportunities for value in this market are starting to present themselves so now is the time that investors should be starting to get back into the markets. Unfortunately, history tells us that for most retail investors they tend to exit the market just at the time when they should be getting back in.

The dollar has gained against global currencies since August 8, when Germany’s mighty economy contracted in the second quarter, triggering one of the biggest dollar rallies in years.

And maybe it was time for a rally. Since peaking more than six years ago versus the world’s major currencies, the U.S. dollar has posted some dizzying declines. Only a few currencies in the world have actually declined in value against the sad buck since late 2001…one of which being the Zimbabwe dollar.

But this current bout of dollar strength has more to do with the surprising weakness of other foreign economies than a resumption of U.S. growth. We’re simply ahead of the curve.

The market views the dollar as a leading currency as other economies begin to grapple with an economic slowdown or, in some cases, recession. The United States has already gone through the process of priming the economy with interest rate cuts and fiscal measures to boost consumption, driving the dollar lower in the process. Now it’s the turn of the Europeans and Japanese. They are only now starting to enter slowdowns in their economic cycles.

That means they’ll be cutting rates, so their currencies will weaken. And the value of their assets – in dollar terms – will decline.

Therefore, savvy investors in the next few months will look to build positions in some of the U.S. economy’s most beaten-down, oversold assets. Specifically, foreign and U.S. investors alike can find significant value and opportunity in distressed U.S. debt, real estate and stocks.

This is pretty typical of professional traders. All the pros leave the FX market alone on holidays. In fact, my opinion is that the Forex market should post a sign that says “Enter at your own risk” during major U.S. holidays.

I say this because the Forex market is like a renegade switch on most holidays. The market is either “turned on” and your trades are moving like crazy (which means it’s hard to predict what will happen next). Or the market is completely “turned off,” and it’s about as interesting as watching paint dry.

More often than not, you’ll see BOTH scenarios happen on a single holiday. First the market will be switched on, and then it will suddenly switch off - or vice versa. Unfortunately, there’s never any telling which comes first…the “calm” or the “storm.”

So on any given holiday, I generally wait until the afternoon to check on the currency markets. Then I just wait for the “show” to start. Frankly, for a seasoned trader like myself, it’s fun to watch the markets move that fast.

But it’s definitely NOT time to start trading. Please keep that in mind for every holiday going forward.

According to the market it is a done deal, with interest rate futures pricing in at least a 0.25% cut, with a further 0.75% expected over the next twelve months.

The green line on the chart represents the level at which the market has priced in a 100% certainty for a 0.25% cut in the rate tomorrow. Currently the red line is above the green line at 116% which means there is a small expectation that the rate cut could be higher.

Therefore, expect the Aussie dollar to potentially rise a bit tomorrow if there is only a 0.25% cut, or fall quite a bit more if there is a 0.50% cut.

This is because the FX markets should have already factored in at least a 0.25% cut. If the RBA does nothing, well, a sharp rally in the AUD would be almost guaranteed.