The Reserve Bank of Australia rate decision will kick the slew of market moving indicators this week, and may trigger heavy selling pressures for the Australian dollar as the bank is anticipated to lower the benchmark interest for the second consecutive meetings.
How To Trade This Event Risk
The Reserve Bank of Australia rate decision will kick the slew of market moving indicators this week, and may trigger heavy selling pressures for the Australian dollar as the bank is anticipated to lower the benchmark interest for the second consecutive meetings. The central bank is expected to cut 50bp to bring the interest rate down to 6.50% as growth prospects for the $1 trillion economy turns bleak. During the month of September, Governor Stevens stated that he anticipates borrowing activity to weaken further as economic growth falters throughout the second half of the year, which would only drag on private-sector consumption in the months ahead. In fact, retail spending slipped to 0.6% from a revised reading of 1.6% in July, while motor vehicle sales plunged 7.2% after falling 4.5% during the same period. Furthermore, second quarter GDP fell to 2.7% from a revised reading of 3.3% in the previous quarter, which suggests that the slowdown in the global economy may drag on growth expectations as for the rest of the year as export demands weaken. Meanwhile, overnight index swaps are showing that market participants expects the central bank to cut at least 150bp over the next 12 months, signaling that investors may continue to hold a bearish outlook for the Aussie throughout the rest of the year as the RBA is anticipated to lower the interest rate further.
Despite the dovish rhetoric held by Governor Stevens, resilient labor demands have certainly helped to keep the economy afloat as the unemployment rate dipped to 4.1% from 4.3% in July amid expectations for a 0.3% gain to 4.4%. The unexpected decline suggests that the domestic economy has held up better than what economists were anticipating, and would help to ease growth concerns for the RBA. Therefore, if the central bank decides to surprise the markets by holding the interest rates steady at 6.50% or only cuts by 25bp to 6.25%, we will look to go long on two lots of AUDUSD. We will look for a green, five-minute candle following the decision to trigger a long trade, and will place the initial stop at the nearby swing low (or reasonable distance), and this risk will equal the first target. Our second target will be base on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
However, as the major economies in the Pacific teeter on the brink of a recession, the RBA could take an preemptive approach in fostering economic growth, and may in fact deliver a 50bp rate cut. As a result, we will look for a red, five-minute candle to generate a short trade for the AUD/USD, and would use the same strategy as the long trade listed above, just in reverse.