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AUD/USD Shorts at Risk Amid Growing Bets for RBA Rate Cut

AUD/USD Shorts at Risk Amid Growing Bets for RBA Rate Cut

2015-02-02 20:20:00
David Song, Shuayng Ren,
Share:

- Reserve Bank of Australia (RBA) to Keep Cash Rate at 2.50% for 16-Consecutive Meetings.

- Will RBA Governor Glenn Stevens Restore the Easing Cycle?

For more updates, sign up for David's e-mail distribution list.

Trading the News: Reserve Bank of Australia (RBA) Interest Rate Decision

The near-term rebound in the AUD/USD may gather pace over the next 24-hours of trade should the Reserve Bank of Australia (RBA) continue to highlight a period of ‘interest rate stability’ in the $1T economy.

What’s Expected:

AUD/USD RBA

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Why Is This Event Important:

Despite growing speculation for a rate cut, RBA Governor Glenn Stevens may endorse a neutral tone for monetary policy, but the central bank head may continue to jawbone the Australian dollar in order to further assist with the rebalancing of the real economy.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Price Index- Trimmed Mean (YoY) (4Q)

2.2%

2.2%

Employment Change (DEC)

5.0K

37.4K

Trade Balance (NOV)

-1600M

-925M

Sticky inflation paired with the pickup in job growth may encourage the RBA to preserve its forward-guidance for monetary policy, and the aussie-dollar may continue to retrace the decline from the beginning of the year should Governor Steven talk down bets for a rate cut.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales (MoM) (NOV)

0.2%

0.1%

Home Loans (MoM) (NOV)

1.7%

-0.7%

Gross Domestic Product s.a. (QoQ) (3Q)

0.7%

0.3%

However, fears of a slower recovery may prompt the RBA to implement a more dovish twist to the forward-guidance, and the Australian dollar may face additional headwinds over the near-term should the central bank show a greater willingness to revert back to its easing cycle.

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How To Trade This Event Risk(Video)

Bullish AUD Trade: RBA Continues to Endorse Period of Interest Rate Stability

  • Need green, five-minute candle following the rate decision for a potential long AUD/USD trade
  • If market reaction favors a long aussie trade, buy AUD/USD with two separate position
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit

Bearish AUD Trade: Governor Stevens Sees Scope for Lower Borrowing-Costs

  • Need red, five-minute candle to consider a short AUD/USD position
  • Carry out the same setup as the bullish aussie trade, just in reverse

Read More:

COT-Small Trader Record Short in Euro & Silver Traders are Bamboozled

EURUSD - Looking For Pre-ECB Prices In Near-Term

Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Long-term outlook remains bearish, but may see a larger rebound in AUD/USD as the Relative Strength Index (RSI) tries to come off of oversold territory.
  • Interim Resistance: 0.8000 (50% retracement) to 0.8020 (100% expansion)
  • Interim Support: 0.7680 (161.8% expansion) to 0.7720 (161.8% expansion)

Impact that 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 2014

12/02/2014 03:30 GMT

2.5%

2.5%

+40

+27

December 2014 Reserve Bank of Australia (RBA) Rate Decision

AUD/USD Chart

The Reserve Bank of Australia (RBA) kept the cash rate unchanged at the record low of 2.50% for another month as the current monetary policy stance remains ‘appropriate’ for sustainable economic growth. Even though RBA Governor Glenn Stevens continued to endorse a period of ‘interest rate stability’ for Australia, the central bank continued to jawbone the local currency as a lower exchange rate is needed for a more balanced recovery. Despite the move higher following the interest rate decision, the market reaction was short-lived as AUD/USD fell back from the session high of 0.8539 to end the day at 0.8506.

--- Written by David Song, Currency Analyst and Shuyang Ren

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

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