How Will the Australian Dollar React to the RBA’s Rate Decision?

Trading the News: Reserve Bank of Australia Interest Rate Decision

What’s Expected
Time of release:        07/07/2009 04:30 GMT, 00:30 EST
Primary Pair Impact :    AUDUSD
Expected:         3.00%   
Previous:         3.00%

Impact the RBA Rate Decision had on AUDUSD over the last 2 monthsmonths

June 2009 RBA Rate Decision

The Reserve Bank of Australia kept the benchmark interest unchanged at 3.00% for the second consecutive month in June, but continued to hold a dovish outlook for future policy as price growth falters. The RBA minutes said that the current policy in place ‘would be consistent with fostering sustainable growth and low inflation,’ but continued to see scope for ‘some further easing’ as the outlook for global growth remains weak. However, as the government pledges A$12B in public handouts and plans to spend A$22B on infrastructure, the board may continue to neutral policy stance going forward as the government takes unprecedented steps to stimulate the ailing economy. As a result, long-term expectations for higher borrowing costs may continue to drive demands for the Australian dollar but at the same time, the appreciation in the exchange rate could hamper the prospects for a recovery as trade conditions falter.

May 2009 RBA Rate Decision

The Australian central bank held official cash rate at the 49-year low of 3.00% as expected, and the Reserve Bank of Australia may hold the interest rate steady over the near-term as they adopt a wait-and-see approach. The board minutes of the May meeting showed that the board expects the $1T economy to ‘record better outcomes than most other advanced economies in 2009 and 2010,’ and went onto say ‘that there were signs that the economic stimulus that had been applied was supporting demand.’ Moreover, RBA Governor Stevens continues to hold an improved outlook for future growth, and said that a ‘recovery will get underway toward the end of the year’ amid expectations for a 1.25% drop in the annual growth rate. At the same time, the board said that they expect ‘higher unemployment and falling inflation, though the earlier depreciation of the exchange rate would slow the decline in prices for some time.’

What To Look For Before The Release
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement: 

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on AUDUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on AUDUSD ahead of the data release.

How To Trade This Event Risk

The Reserve Bank of Australia is widely anticipated to hold the cash rate steady at the 49-year low of 3.00% for the third consecutive month in July as policymakers anticipate an economic recovery later this year, and long-term expectations for higher borrowing costs may continue to drive AUD/USD higher over the near-term. At the same time, the RBA held a cautious tone at the June policy meeting, saying that the appreciation in the exchange rate has “reduced the stimulus to the economy.” which the bank associates with “changes in sentiment toward the U.S. dollar and risk appetite more generally, rather than any specific reassessment about Australia’s economic prospects.” The 1Q GDP reading showed economic activity unexpectedly expanded in the first quarter, with the growth rate rising at an annual rate of 0.4%, and the data encourages an improved outlook for the region as the government takes unprecedented steps to stimulate the $1T economy. Moreover, consumer inflation expectations rose for the third consecutive month in June, while consumer confidence surged 12.7% during the same period to mark the biggest advance in 22-years, and the turnaround in the domestic economy could lead the central bank to hold an enhanced outlook for the region as growth prospects improve. However, a government report showed the trade deficit widened to A$ 556M in May, driven by a 5.0% drop in exports, while full-time employment fell 26.2K in during the same period as businesses continued to scale back on production and employment in an effort to whether the downturn in global trade. Meanwhile, as the government pledges A$12B in public handouts and plans to spend A$22B on infrastructure development, a Bloomberg News survey shows all of the 20 economists polled forecast the RBA to hold the benchmark interest rate at 3.00%, and the central bank may keep on the sidelines throughout the second half of the year as the fiscal measures trickle through the real economy. As a result, the AUD/USD may continue to push higher as policymakers adopt a wait-and-see approach however, statements following the rate decision could weigh on the exchange rate as Governor Glenn Stevens maintains a dovish outlook for future policy.

Trading the given event risk may not be as clear cut as some of our previous trade but nevertheless, as market participants anticipate the RBA to hold borrowing costs steady over the near-term, price action following the announcement could set the stage for a long aussie trade. Therefore, if the central bank keeps the cash rate at 3.00% and holds an improved outlook for growth and inflation, we will look for a green, five-minute candle following the decision to confirm a buy entry on two-lots of AUD/USD. Once these conditions are met, we will set our initial stop at the nearby swing low, or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

In contrast, fears of a protracted recession paired with the slump in global trade could lead the central bank to hold a dovish tone going forward, and comments indicative of a future rate cut should lead the exchange rate lower as investors weigh the outlook for future policy. As a result, if the RBA leaves the door open for a potential rate cut later this year and holds a dour outlook for future growth, we will favor a bearish forecast for the higher-yielding currency, and will follow the same strategy for a short aussie-dollar trade as the long position mentioned above, just in reverse.