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AUD/USD- Trading the Reserve Bank of Australia (RBA) Meeting

AUD/USD- Trading the Reserve Bank of Australia (RBA) Meeting

David Song, Strategist

Trading the News: Reserve Bank of Australia Interest Rate Decision

What’s Expected:

Time of release: 07/02/2013 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:

The Reserve Bank of Australia (RBA) is widely expected to keep the benchmark interest rate at 2.75% in July, but the fresh batch of central bank rhetoric may drag on the Australian dollar should Governor Glenn Stevens show a greater willingness to further embark on the easing cycle. According to Credit Suisse overnight index swaps, market participants are pricing at least one more 25bp rate cut over the next 12-months, and the RBA may push the cash rate to a fresh record-low in the second-half of the year in an effort to further insulate the $1T economy.

Recent Economic Developments

The Upside

Release

Expected

Actual

Private Sector Credit (YoY) (MAY)

2.9%

3.0%

Employment Change (MAY)

-10.0K

1.1K

Westpac Consumer Confidence (JUN)

--

4.7%

The Downside

Release

Expected

Actual

Trade Balance (APR)

180M

28M

Gross Domestic Product (QoQ) (1Q)

0.7%

0.6%

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

0.3%

0.2%

The rebound in employment along with the expansion in private sector credit may encourage the RBA to scale back its dovish tone for monetary policy, and a more neutral policy statement may heighten the appeal of the higher-yielding currency as market participants scale back bets for more easing. However, the persistent weakness in global trade paired with the ongoing slack in the real economy may prompt Governor Stevens to deliver another rate cut in 2013, and the Australian dollar may face additional headwinds over the remainder of the year as the fundamental outlook for the region remains weak.

Potential Price Targets For The Rate Decision

Forex_AUDUSD-_Trading_the_Reserve_Bank_of_Australia_RBA_Meeting_body_ScreenShot111.png, AUD/USD- Trading the Reserve Bank of Australia (RBA) Meeting

As the relative strength index on the AUDUSD bounces back from oversold territory, the rebound from 0.9106 may gather pace in the coming days, and a more neutral statement from the RBA may spur a more meaningful correction in the exchange rate as market participants scale back bets for lower borrowing costs. However, the pair may produce a fresh yearly low should the RBA rate decision heighten speculation for another rate cut, and the bearish trend dating back to 2011 may continue to take shape as the fundamental outlook for the region deteriorates.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades as we anticipate the RBA to preserve its current policy in July, but a less-dovish statement accompanying the rate decision could pave the way for a long Australian dollar trade as market participants scale back bets for a rate cut. Therefore, if Governor Stevens strikes an improved outlook for the $1T economy, we will need a green, five-minute candle subsequent to the announcement 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 an effort to preserve our gains.

In contrast, the ongoing slack in the real economy paired with the weakening outlook for growth and inflation may keep prompt 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 further insulate the economy. As a result, if the RBA surprises with a 25bp rate cut or strike a highly dovish tone for monetary policy, 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)

JUN 2012

06/04/2013 4:30 GMT

2.75%

2.75%

+15

-68

June 2013 Reserve Bank of Australia Interest Rate Decision

Forex_AUDUSD-_Trading_the_Reserve_Bank_of_Australia_RBA_Meeting_body_ScreenShot110.png, AUD/USD- Trading the Reserve Bank of Australia (RBA) Meeting

Indeed, the Reserve Bank of Australia kept the door open to introduce additional rate cuts after holding the benchmark interest rate at 2.75%, and the central bank may further embark on its easing cycle in the second-half of the year in order to encourage a stronger recovery. Despite the uptick immediately following the rate decision, the AUDUSD struggled to hold its ground throughout the day, with the pair closing at 0.9646.

--- Written by David Song, Currency Analyst

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

Follow me on Twitter at @DavidJSong

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