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AUD/USD Range Vulnerable to Larger Shift in RBA Policy Outlook

By , Currency Analyst  and Gregory Marks
05 May 2014 21:00 GMT

- Reserve Bank of Australia (RBA) to Keep Benchmark Rate at 2.50%

- RBA to Preserve Current Policy for the Seventh Consecutive Meeting

Trading the News: Reserve Bank of Australia Interest Rate Decision

Despite expectations of seeing the Reserve Bank of Australia (RBA) retain its current policy in May, the policy statement accompanying the interest rate decision may undermine the bullish sentiment surrounding the AUD/USD should the central bank adopt a more dovish tone for monetary policy.

What’s Expected:

AUD/USD RBA Meeting

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Why Is This Event Important:

Indeed, Governor Glenn Stevens may take a more aggressive approach in weakening the Australian dollar as the persistent strength in the higher-yielding currency undermines the central bank’s upbeat assessment of the $1T economy, and the AUD/USD may face a more material decline over the next 24-hours of trading should the RBA show a greater willingness to further embark on its easing cycle.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Private Sector Credit (MoM) (MAR)

0.4%

0.4%

Employment Change (MAR)

2.5K

18.1K

Home Loans (MoM) (FEB)

1.5%

2.3%

The ongoing expansion in private sector lending paired with the pickup in job growth may push the RBA to normalize monetary policy sooner rather than later, and the bullish sentiment surrounding the AUD/USD may gather pace in May should the central bank retain an upbeat tone for the $1T economy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Building Approvals (MoM) (MAR)

1.5%

-3.5%

Consumer Price Index (YoY) (1Q)

3.2%

2.9%

Retail Sales (MoM) (FEB)

0.3%

0.2%

However, the RBA may push for a weaker exchange rate as it undermines the outlook for growth and inflation, and Governor Glenn Stevens may look to further assist with the rebalancing of the real economy amid the persistent slack in private sector activity.

How To Trade This Event Risk(Video)

Bullish AUD Trade: RBA Adopts Hawkish Tone & Shows Greater Willingness for Rate Hike

  • Need green, five-minute candle following the statement for a potential long Australian dollar trade
  • If market reaction favors a long trade, buy AUD/USD with two separate position
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit

Bearish AUD Trade: Governor Stevens Implements More Aggressive Verbal Intervention

  • Need red, five-minute candle to consider a short AUD/USD position
  • Carry out the same setup as the bullish aussie trade, just in the opposite direction

Potential Price Targets For The Release

Join DailyFX on Demand to Cover Current Australian dollar Trade Setups

AUD/USD Daily

AUD/USD Range Vulnerable to Larger Shift in RBA Policy Outlook

Chart - Created Using FXCM Marketscope 2.0

  • Downside Remains Favorable as RSI Fails to Retain Bullish Momentum
  • Interim Resistance: 0.9460-70 (23.6 expansion)
  • Interim Support: 0.9200 (100.0 expansion) to 0.9220 (61.8 retracement)

Impact that Reserve Bank of Australia 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 2014

04/01/2014 3:30 GMT

2.50%

2.50%

-16

-40

April 2014 Reserve Bank of Australia Rate Decision

AUD/USD Chart

At the April RBA meeting we saw the central bank leave the key benchmark rate at 2.50% while reiterating that it sees a period of interest-rate stability. Despite a large fourth quarter CPI figure, inflation was said to remain in line with targets and that monetary policy was to remain accommodative. Few comments were given in regards to the FX rate, but the AUDUSD pair saw chop before ending lower on the day.

Read More:

Forex Markets on the Verge of Volatility with Stocks, Bonds?

FX Price Action Favors Selling US Dollar and Japanese Yen Rallies

--- Written by David Song, Currency Analyst and Gregory Marks

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

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05 May 2014 21:00 GMT