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AUD/USD: Trading the Reserve Bank of Australia Interest Rate Decision

By , Currency Analyst
29 July 2011 20:16 GMT

Trading the News: Reserve Bank of Australia Interest Rate Decision

What’s Expected:

Time of release: 08/02/2011 4:30 GMT, 0:30 EST

Primary Pair Impact: AUDUSD

Expected: 4.75%

Previous: 4.75%

DailyFX Forecast: 4.75%

Why Is This Event Important:

The Reserve Bank of Australia is widely expected to keep the benchmark interest rate at 4.75% in August, but the central bank may continue to soften its hawkish tone for monetary policy as the region faces a slowing recovery. As RBA Governor Glenn Stevens casts a cautious outlook for the economy, market participants see the central bank lowering the cash rate by nearly 25bp over the next 12-months, and interest rate expectations may deteriorate further in the second-half of the year should the board abandon the mildly restrictive policy stance. However, Mr. Stevens may continue to endorse a wait-and-see approach as the region benefits from the expansion in global trade, and the central bank head may talk down speculation for a rate hike as rising commodity prices heightens the risk for inflation.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Prices (YoY) (2Q)

3.4%

3.6%

Producer Price Index (YoY) (2Q)

3.4%

3.4%

Import Price Index (QoQ) (2Q)

-1.1%

0.8%

The Downside

Release

Expected

Actual

Westpac Consumer Confidence s.a. (MoM) (JUL)

--

-8.3%

Building Approvals (MoM) (MAY)

-0.5%

-7.9%

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

0.3%

-0.6%

As price pressures intensify, the RBA may see scope to toughen its stance against inflation, and the central bank may open the door to raise borrowing costs beyond 4.75% in order to preserve price stability. However, the slowdown in private sector activity paired with the downturn in household confidence may encourage the central bank to retain a cautious outlook for the region, and Governor Stevens may continue to strike a balanced tone for future policy as the economy copes with the aftermath of the natural disasters from earlier this year. In turn, dovish comments from the RBA could fuel the reversal in the AUD/USD, and the high-yielding currency may give back the advance from earlier this week as interest rate expectations falter.

Potential Price Targets For The Rate Decision

AUDUSD_Trading_the_Reserve_Bank_of_Australia_Interest_Rate_Decision_body_ScreenShot037.png, AUD/USD: Trading the Reserve Bank of Australia Interest Rate Decision

How To Trade This Event Risk

As market participants expect the RBA to keep the benchmark interest rate 4.75%, trading the rate decision is certainly not as clear cut as some of our previous trades, but the policy statement accompanying the rate decision should spark volatility in the exchange rate as investors weigh the outlook for future policy. Therefore, if the central bank holds and improved outlook for the region and sees a heightening risk for inflation, we will need to see a green, five-minute candle following the announcement to generate a buy entry on two-lots of AUD/USD. Once these conditions are fulfilled, we will place the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish 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 reaches its mark in order to preserve our profits.

On the other hand, the ongoing weakness in private sector activity paired with the slowdown in global trade may encourage the RBA to soften its hawkish outlook for monetary policy, and the central bank may endorse a wait-and-see approach throughout the remainder of the year in an effort to balance the risks for the region. As a result, if the central bank looks to move away from the mildly restrictive policy stance, we will carry out the same setup for a short aussie-dollar trade as the long position mentioned above, just in reverse.

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)

JUL 2011

07/05/2011 4:30 GMT

4.75%

4.75%

-17

+34

July 2011 Reserve Bank of Australia Interest Rate Decision

As expected, the Reserve Bank of Australia kept the benchmark interest rate at 4.75% in July, but softened its hawkish tone for monetary policy as the recovery from the Queensland flood ‘continues to proceed more slowly than initially expected.’ At the same time, the RBA now expects price growth to be near the 2-3% target range over the next 12-months, and Governor Glenn Stevens looks poised to endorse a wait-and-see approach throughout the remainder of the year as the region faces a slowing recovery. In turn, the central bank may look to abandon the mildly restrictive policy stance in the second-half of the year and the board may see scope to bring the cash rate back down from 4.75% as it aims to balance the risks for the region. Indeed, the cautious tone struck by the RBA triggered a bearish reaction in the AUD/USD, with the exchange rate slipping below 1.0650, but the high-yielding currency regained its footing during the North American trade as the exchange rate settled at 1.0732 at the end of the day.

AUDUSD_Trading_the_Reserve_Bank_of_Australia_Interest_Rate_Decision_body_ScreenShot027.png, AUD/USD: Trading the Reserve Bank of Australia Interest Rate Decision

Questions? Comments? Join us in the DailyFX Forum

Join DailyFX Currency Strategist Ilya Spivak in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

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29 July 2011 20:16 GMT