AUD/USD- Trading the Reserve Bank of Australia (RBA) Meeting

DailyFX

Trading the News: Reserve Bank of Australia Interest Rate Decision

What’s Expected:

Time of release: 05/07/20134:30 GMT, 0:30 EDT

Primary Pair Impact: AUDUSD

Expected: 3.00%

Previous: 3.00%

DailyFX Forecast: 3.00%

Why Is This Event Important:

A Bloomberg News survey shows 21 of the 29 economists polled see the Reserve Bank of Australia (RBA) keeping the benchmark interest rate at 3.00%, but the central bank may continue to carry out its easing cycle over the coming months in an effort to encourage a stronger recovery. Indeed, RBA Governor Glenn Stevens may surprise with a rate cut amid the ongoing weakness in the $1T economy, and the central bank head may introduce further reduce the cash rate in the coming months as China – Australia’s largest trading partner – remains at risk for a ‘hard landing.’

Recent Economic Developments

The Upside

Release

Expected

Actual

Private Sector Credit (YoY) (MAR)

3.2%

3.2%

Home Loans (MoM) (FEB)

1.5%

2.0%

Trade Balance (FEB)

-1000M

-178M

The Downside

Release

Expected

Actual

Retail Sales s.a. (MoM) (MAR)

0.1%

-0.4%

Consumer Prices (YoY) (1Q)

2.8%

2.5%

Employment Change (MAR)

-7.5K

-36.1K

The expansion in private sector lending along with the narrowing trade deficit may keep the RBA on the sidelines, and Governor Stevens may strike a more neutral tone for monetary policy as the previous rate cuts continue to work their way through the real economy. However, slowing consumption along with easing price growth may push the RBA to embark on its easing cycle throughout 2013, and the central bank may carry its accommodative policy stance into the following year in an effort to combat the downside risks surrounding the region.

Potential Price Targets For The Rate Decision

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Forex_AUDUSD-_Trading_the_Reserve_Bank_of_Australia_RBA_Meeting_body_ScreenShot211.png, AUD/USD- Trading the Reserve Bank of Australia (RBA) Meeting

As the relative strength index on the AUDUSD remains capped by the 67 figure, we should see the aussie-dollar maintain the downward trend dating back to 2011, and the pair may struggle to hold above the 50.0% Fibonacci retracement from the 2011 high to low around 1.0230 should the RBA rate decision fuel bets for lower borrowing costs. However, we may see the AUDUSD threaten the bearish trend should Governor Stevens remain on the sidelines, and the pair may make another run at the 1.0600 figure as currency traders scale back bets for additional monetary support.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades as the RBA is expected to keep the cash rate on hold, but a less-dovish statement accompanying the rate decision could set the stage for a long Australian dollar trade as market participants scale back bets for a rate cut. Therefore, if Governor Stevens strikes an improved outlook for the $1T economy, we will need a green, five-minute candle subsequent to the announcement to establish a long entry on two-lots of AUDUSD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in order to preserve our profits.

In contrast, the persistent slack in private sector activity paired with the weakening outlook for inflation may continue to dampen the outlook for the region, and Governor Stevens may show a greater willingness to push the benchmark interest rate to a fresh record-low in an effort to stem the downside risks for growth and inflation. As a result, if the RBA unexpectedly announces a 25bp rate cut or hints at lower borrowing costs, we will carry out the same strategy for a short aussie-dollar as the long position mentioned above, just in the opposite direction.

Impact that the RBA Interest Rate Decision has had on AUD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

APR 2012

04/02/2013 3:30 GMT

3.00%

3.00%

+3

-8

April 2013 Reserve Bank of Australia Interest Rate Decision

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Forex_AUDUSD-_Trading_the_Reserve_Bank_of_Australia_RBA_Meeting_body_ScreenShot210.png, AUD/USD- Trading the Reserve Bank of Australia (RBA) Meeting

Indeed, the Reserve Bank of Australia kept the benchmark interest rate at 3.00%, with Governor Glenn Stevens reiterating that ‘the inflation outlook, as assessed at present, would afford scope to ease policy further,’ and it seems as though the central bank will continue to embark on its easing cycle over the coming months as the resource boom comes to an end. Although the AUDUSD tracked higher following the rate decision, the higher-yielding currency struggled to hold its ground as the pair ended the day at 1.0448.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

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