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AUD/USD- Trading the Reserve Bank of Australia Rate Decision

AUD/USD- Trading the Reserve Bank of Australia Rate Decision

2013-02-04 20:00:00
David Song, Strategist

Trading the News: Reserve Bank of Australia Interest Rate Decision

What’s Expected:

Time of release: 02/05/2012 3:30 GMT, 22:30 EST

Primary Pair Impact: AUDUSD

Expected: 3.00%

Previous: 3.00%

DailyFX Forecast: 3.00%

Why Is This Event Important:

A Bloomberg News survey shows 24 of the 28 economists polled see the Reserve Bank of Australia (RBA) holding the benchmark interest rate at 3.00%, while market participants are pricing a 17% chance for a 25bp rate cut according to Credit Suisse overnight index swaps. Although there’s little expectations for seeing lower borrowing costs in the $1T economy, the policy statement accompanying the rate decision may dampen the appeal of the high-yielding currency should the central bank show a greater willingness to carry out its easing cycle throughout 2013.

Recent Economic Developments

The Upside

Release

Expected

Actual

Private Sector Credit (MoM) (DEC)

0.2%

0.4%

Business Confidence (DEC)

--

3

Westpac Consumer Confidence s.a. (MoM) (JAN)

--

0.6%

The Downside

Release

Expected

Actual

Consumer Prices (QoQ) (4Q)

2.4%

2.2%

Employment Change (DEC)

4.0K

-5.5K

Retail Sales s.a. (MoM) (NOV)

0.3%

-0.1%

The expansion in private sector credit along with the rebound in household and business confidence may encourage the RBA to retain its current policy over the near to medium-term, and a less-dovish statement from the RBA may spark a rally in the higher-yielding currency as market participants scale back bets for lower borrowing costs. However, Governor Stevens may see scope to push the cash rate to a fresh record-low amid easing price pressures along with the ongoing slack in private sector activity, and hints of further rate cuts should drag on the exchange rate as market participants weigh the outlook for monetary policy.

Potential Price Targets For The Rate Decision

Forex_AUDUSD-_Trading_the_Reserve_Bank_of_Australia_Rate_Decision_body_ScreenShot228.png, AUD/USD- Trading the Reserve Bank of Australia Rate Decision

As the AUDUSD struggles to maintain the upward trending channel dating back to October, the pair looks as though it has carved a lower top around 1.0600, and the lack of momentum to push above the key figure may pave the way for a major reversal in the exchange rate should the RBA show a greater willingness to ease monetary policy further. However, we may see the aussie-dollar come up against the downward trendline taken from the 2011 high if Governor Stevens adopts a more neutral tone for monetary policy, and we may see the track higher over the near to medium-term as market participants scale back bets for a rate cut.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades as the RBA is widely expected to keep the benchmark interest rate at 3.00%, but a less-dovish statement accompanying the rate decision could set the stage for a long Australian dollar trade as it dampens speculation for more easing. Therefore, if Governor Stevens strikes an improved outlook for the region, we will need to see a green, five-minute candle following the decision to generate a long entry on two-lots of AUDUSD. 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 hits its mark in order to preserve our profits.

On the other hand, the weakness in private sector activity paired with the slowdown in global trade may continue to dampen the outlook for the $1T economy, and Governor Stevens may show a greater willingness to further embark on the easing cycle in an effort to stem the downside risks surrounding the region. As a result, if the RBA announces a 25bp rate or sounds increasingly dovish this time around, we will implement the same strategy for a short aussie-dollar as the long position mentioned above, just in the opposite direction.

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)

DEC 2012

12/04/2012 3:30 GMT

3.00%

3.00%

+15

+53

December 2012 Reserve Bank of Australia Interest Rate Decision

Forex_AUDUSD-_Trading_the_Reserve_Bank_of_Australia_Rate_Decision_body_ScreenShot227.png, AUD/USD- Trading the Reserve Bank of Australia Rate Decision

The Australian dollar came under pressure as the Reserve Bank of Australia lowered the benchmark interest rate by 25bp to 3.00% in December, but the initial reaction was short-lived as Governor Glenn Stevens struck a rather neutral tone for monetary policy. Although the RBA continued to highlight the headwinds emerging from the marked appreciation in the local currency, the less-dovish policy statement propped up the Australian dollar, with the AUDUSD ending the day at 1.0477.

--- 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, please follow this link.

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