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Trading the News: Reserve Bank of Australia Interest Rate Decision

What’s Expected:

Time of release: 06/04/2013 4:30 GMT, 0:30 EDT

Primary Pair Impact: AUDUSD

Expected: 2.75%

Previous: 2.75%

DailyFX Forecast: 2.75%

Why Is This Event Important:

Although the Reserve Bank of Australia (RBA) is widely expected to keep the benchmark interest rate at 2.75% in June, the policy statement accompanying the rate decision may drag on the exchange rate should Governor Glenn Stevens carry the easing cycle into the second-half of the year. However, the RBA may scale back its dovish tone for monetary policy as the previous rate cuts continue to work way through the real economy, and the central bank may retain its current policy in the third-quarter amid the bright signs coming out of the region.

Recent Economic Developments

The Upside

Release

Expected

Actual

Private Sector Credit (MoM) (APR)

0.3%

0.3%

Building Approvals (MoM) (APR)

4.0%

9.1%

Employment Change (QoQ) (APR)

11.0K

50.1K

The Downside

Release

Expected

Actual

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

0.3%

0.2%

NAB Business Confidence (APR)

--

-2

Consumer Prices (YoY) (1Q)

2.8%

2.5%

The ongoing expansion in private sector credit along with the sharp rebound in employment may encourage the RBA to adopt an improved outlook for the $1T economy, and the fresh batch of central bank rhetoric may increase the appeal of the higher-yielding currency should Governor Stevens talk down bets for lower borrowing costs. However, the slowdown in household spending paired with the drop in business confidence may further dampen the outlook for inflation, and the RBA may keep the door open to deliver another rate cut in an effort to encourage a stronger recovery.

Potential Price Targets For The Rate Decision

Forex_AUDUSD-_Trading_the_Reserve_Bank_of_Australia_RBA_Meeting_body_ScreenShot006.png, AUD/USD- Trading the Reserve Bank of Australia (RBA) Meeting

As the relative strength index on the AUDUSD snaps back from oversold territory, we would need to see the RBA scale back its dovish tone for monetary policy to see the rebound from 0.9527 gather pace. However, as the aussie-dollar struggles to push back above the 23.6% Fibonacci retracement from the 2011 high to low around 0.9780-90, a dovish policy statement may keep the pair range-bound over the near-term, and we may see the downward trend continue to take shape should the RBA see scope to introduce further rate cuts.

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 expected to retain its current policy, but a less-dovish statement from the central bank could pave the way for a long Australian dollar trade as market participants scale back bets for a rate cut. Therefore, if Governor Stevens adopts an improved outlook for the $1T economy, we will need to see a green, five-minute candle following the announcement to generate a long entry on two-lots of AUDUSD. Once these conditions are fulfilled, 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 objective. The second target 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 secure our gains.

On the other hand, the persistent slack in the real economy paired with the weakening outlook for inflation may keep the door open for further rate cuts, and Governor Stevens may show a greater willingness to push the benchmark interest rate to a fresh record-low in an effort to stem the downside risks surrounding the region. As a result, if the RBA continues to strike a dovish tone for monetary policy, we will carry out the same setup for a short aussie-dollar as the long position mentioned 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)

MAY 2012

05/07/2013 4:30 GMT

3.00%

2.75%

-39

-51

May 2013 Reserve Bank of Australia Interest Rate Decision

Forex_AUDUSD-_Trading_the_Reserve_Bank_of_Australia_RBA_Meeting_body_ScreenShot005.png, AUD/USD- Trading the Reserve Bank of Australia (RBA) Meeting

The Reserve Bank of Australia surprised with a 25bp rate cut, with Governor Glenn Stevens pushing the benchmark interest rate to a fresh record-low of 2.75%, and the central bank may continue to embark on its easing cycle in an effort to encourage a stronger recovery. Indeed, the rate cut dragged on the Australian dollar, with the AUDUSD slipping below the 1.0200 figure, and the higher-yielding currency struggled to hold its ground throughout the day as the pair closed at 1.0183.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

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