AUD/USD: Trading the Reserve Bank of Australia Interest Rate Decision
Trading the News: Reserve Bank of Australia Interest Rate Decision
Why Is This Event Important:
However, a hawkish policy statement would spark increased volatility in the Australian dollar and spur a rally in the high-yielding currency as market participants weigh the prospects for future policy.
Time of release: 07/06/2010 4:30 GMT, 0:30 EST
Primary Pair Impact : AUDUSD
Will This Be Market Moving (Scenarios):
A Bloomberg News survey shows all of the 22 economists polled forecast the RBA to keep the benchmark interest rate unchanged at 4.50%, while investors are pricing a zero percent chance for a 25bp rate hike according to Credit Suisse overnight index swaps, and the central bank may look to keep borrowing costs on hold in the second-half of the year as it aims to balance the risks for the economy. However, as the marked expansion in the emerging economies raises the risks for inflation, Governor Glenn Stevens may tighten policy going forward as the global recovery gathers pace.
The rebound in global trade paired with the ongoing improvement in the labor market could lead the central bank to raise its assessment for growth and inflation, and the RBA may turn increasingly hawkish over the coming months as the economic outlook improves. As a result, Governor Stevens may see scope to increase borrowing costs further over the coming months, and comments following the rate decision could spur expectations for a rate hike and spark a rally in the Australian dollar.
At the same time, the drop in business sentiment paired with the pull back in inflation expectations may give the RBA scope to maintain a wait-and-see approach over the coming months, and the central bank may look to hold the cash rate steady over the coming months as the government stimulus tapers off. Accordingly, dovish comments following the rate decision is likely to weigh on the exchange rate and can lead the Australian dollar to retrace the advance from June lows as investors scale back expectations for a rate hike in the third-quarter.
How To Trade This Event Risk
As the RBA is widely expected to hold the benchmark interest rate steady at 4.50%, trading the given event risk certainly favors a bearish outlook for the Australian dollar but nevertheless, the policy statement following the rate decision could spark a rally in the high-yielding currency as investors weigh the prospects for future policy. Therefore, if Governor Stevens turns increasingly hawkish and sees scope to increase the cash rate further over the coming months, we will need to see a green, five-minute candle following the release to generate a buy entry on two-lots of AUD/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance after taking market volatility into account, and this risk will establish our first target. The 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 mark in order to preserve our profits.
In contrast, the uncertainties surrounding the global recovery paired with the instability in the global financial system could lead the RBA to maintain a neutral policy stance in the second-half of the year, and dovish commentary following the rate decision could set the stage to sell the high-yielding currency as interest rate expectations falter. As a result, if Governor Stevens sees scope to hold the benchmark interest rate at 4.50% over the medium-term, we will favor a bearish outlook for the AUD/USD, and will implement the same strategy for a short aussie-dollar trade as the long position laid out above, just in reverse.
Impact RBA Interest Rate Decision has had over the AUD during the past month
June 2010 Reserve Bank of Australia Interest Rate Decision
|The Reserve Bank of Australia kept the benchmark interest rate at 4.50% in June, and held a neutral outlook for future policy as “difficulties in Europe would inevitably weigh somewhat on prospects for global growth.” At the same time, the central bank said that the medium-term outlook for the region “remained positive” as it continues to benefit from the marked expansion in the emerging economies, and went onto say that the recent rake hikes “afforded policy the flexibility to await information on how the recent market uncertainty might affect the global economy, as well as news about the outlook for inflation.” Moreover, the RBA “noted some signs that the earlier buoyancy in the housing market was easing” following the rise in borrowing costs, and argued that “market confidence had been severely eroded, and some governments were now in the very difficult position of having to tighten fiscal policy at a time when growth remained weak.”|
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:
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.
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.
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To discuss this report contact David Song, Currency Analyst: email@example.com
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