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

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

2011-10-03 19:19:00
David Song, Currency Strategist
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Trading the News: Reserve Bank of Australia Interest Rate Decision

What’s Expected:

Time of release: 10/04/2011 3:30 GMT, 23:30 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 October, but the statement accompanying the rate decision is likely to spur a major reaction in the Australian dollar as market participants weigh the prospects for future policy. As world officials step up their efforts to address the risks underling the global economy, RBA Governor Glenn Stevens may strike an improved outlook for the isle-nation, and the central bank head may keep the door open to normalize monetary policy further in order to stem the risk for inflation.

However, we may see the RBA continue to soften its dovish tone for monetary policy in light of the slowing recovery, and the central bank may show an increased willingness to scale back the rate hikes from the previous year in an effort to shore up the ailing economy. According to Credit Suisse overnight index swaps, market participants see the cash rate being lowered by nearly 150bp over the next 12-motnhs, and speculation for lower borrowing costs casts a bearish outlook for the high-yielding currency as interest rate expectations deteriorate.

Recent Economic Developments

The Upside

Release

Expected

Actual

Private Sector Credit (MoM) (AUG)

0.2%

0.2%

Consumer Inflation Expectation (SEP)

--

2.8%

Gross Domestic Product (QoQ) (2Q)

1.0%

1.2%

The Downside

Release

Expected

Actual

NAB Business Confidence (AUG)

--

-8

Trade Balance (JUL)

1900M

1826M

Employment Change (AUG)

10.0K

-9.7K

Expectations for higher inflation paired with the ongoing expansion in private sector credit may lead the RBA to hold an improved outlook for the isle-nation, and we may see a sharp reversal in the AUD/USD as market participants scale back speculation for lower borrowing costs. However, the slowdown in global trade paired with the downturn in employment may encourage the central bank the central bank to scale back the rate hikes from back in 2010, and RBA Governor Stevens may talk up speculation for lower rates as the outlook for future growth weakens. In turn, the AUD/USD may continue to retrace the advance carried over from 2010, and the exchange rate may fall back towards former resistance around 0.9400 to test for near-term support.

Potential Price Targets For The Rate Decision

AUDUSD_Trading_the_Reserve_Bank_of_Australia_Interest_Rate_Decision_body_ScreenShot022.png, AUD/USD: Trading the Reserve Bank of Australia Interest Rate Decision

How To Trade This Event Risk

Attempting to trade the RBA rate decision may not be as clear cut as some of our previous trades, but the comments following the rate decision could pave the way for a long Australian dollar trade should the central bank strike an improved outlook for the region. Therefore, if Governor Stevens talks down speculation for lower interest rates, we will need a green, five-minute candle following the statement 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 from the entry, 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 cost once the first trade reaches its mark in order to preserve our profits. .

On the other hand, the RBA may continue to scale back its hawkish tone for monetary policy in light of the slowing recovery, and the central bank may show an increase willingness to lower the interest rate from 4.75% as growth and inflation falter. As a result, if the central bank talks up expectations of abandoning the mildly restrictive policy, we will carry out the same setup for a short aussie-dollar trade as the long position laid out 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)

SEP 2011

09/06/2011 4:30 GMT

4.75%

4.75%

-1

-27

September 2011 Reserve Bank of Australia Interest Rate Decision

As expected, the Reserve Bank of Australia kept the benchmark interest rate at 4.75% in September, and the central bank may continue to endorse a wait-and-see approach throughout the remainder of the year as the outlook for global growth remains clouded with high uncertainty. Indeed, the RBA reiterated that the economic recovery appears to be weaker than initially expected, which has dampened the outlook for inflation, and went onto say that the fundamental outlook for the world economy ‘had become significantly more clouded since the previous board meeting.’ The neutral tone held by the central bank suggests borrowing costs will stay at 4.75% over the coming months, but the RBA may have little choice but to scale back the rate hikes from the previous year as growth and inflation falter. Indeed, the RBA rate decision produced a whipsaw-like reaction in the AUD/USD, but the Australian dollar struggled to hold its ground throughout the day as the exchange rate closed at 1.0483.

AUDUSD_Trading_the_Reserve_Bank_of_Australia_Interest_Rate_Decision_body_ScreenShot021.png, AUD/USD: Trading the Reserve Bank of Australia Interest Rate Decision

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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

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