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AUD/USD Range at Risk on Dovish RBA Forward Guidance- 0.7730 in Focus

AUD/USD Range at Risk on Dovish RBA Forward Guidance- 0.7730 in Focus

David Song, Shuyang Ren,

- Reserve Bank of Australia (RBA) Expected to Cut the Cash Rate by Another 25bp to 2.00%.

- Will RBA Governor Glenn Stevens Highlight a Dovish Forward-Guidance for Policy?

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Trading the News: Reserve Bank of Australia Interest Rate Decision

AUD/USD may fail to retain the range-bound price action carried over from the previous month should the Reserve Bank of Australia (RBA) show a greater willingness to further embark on its easing cycle.

What’s Expected:

AUD/USD RBA

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Why Is This Event Important:

Beyond speculation for another 25bp rate cut, the forward-guidance for monetary policy may play the greatest role in driving the market reaction, and we may see Governor Glenn Stevens retain his pledge to further assist with the rebalancing of the real economy amid the weakening outlook across the Asia-Pacific region.

Expectations: Bearish Argument/Scenario

ReleaseExpectedActual
Company Operating Profit (QoQ) (4Q)0.5%-0.2%
Private Capital Expenditure (4Q)-1.6%-2.2%
House Price Index (QoQ) (4Q)1.8%1.9%

The deterioration in home affordability paired with downturn in business investments may encourage the RBA to further support the $1T economy, and a dovish forward-guidance for monetary policy may heighten the bearish sentiment surrounding the Australian dollar especially as the central bank head retains the verbal intervention on the local currency.

Risk: Bullish Argument/Scenario

ReleaseExpectedActual
Retail Sales ex Inflation (QoQ) (4Q)1.1%1.5%
Trade Balance (DEC)-850M-436K
Consumer Price Index- Trimmed Mean (YoY) (4Q)2.2%2.2%

Nevertheless, improved demand from home and abroad along with sticky inflation may prompt the RBA to endorse a wait-and-see approach, and AUD/USD may face a larger correction in the days ahead should the central bank largely talk down bets for lower borrowing-costs.

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How To Trade This Event Risk(Video)

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

  • Need red, five-minute candle following the rate decision for a potential short AUD/USD trade
  • If market reaction favors a bearish aussie trade, sell AUD/USD with two separate position
  • Set stop at the near-by swing high/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

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

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

Read More:

Price & Time: GBP/USD Mixed Signals

Australian Dollar Spec Short Position is Largest Since January 2014

Potential Price Targets For The Release

AUD/USD Daily Chart

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: 0.8020 (38.2% expansion) to 0.8040 (61.8% retracement)
  • Interim Support: 0.7720 (161.8% expansion) to 0.7740 (78.6% expansion)

Impact that the RBA Interest Rate decision has had on AUD during the last meeting

PeriodData ReleasedEstimateActualPips ChangePips Change
FEB 201502/03/2014 3:30 GMT2.50%2.25%-151-172

February 2015 Reserve Bank of Australia (RBA) Interest Rate Decision

AUD/USD Chart

The Reserve Bank of Australia (RBA) unexpectedly cut the cash rate by 25bp to a new record low of 2.25% in February as the economic outlook remains mired by the slowdown in global growth, weak domestic demand and falling energy prices.The RBA judged that lower borrowing-costs were appropriate to further support economic activity as the economy continues to perform below-trend, and we may see Governor Glenn Stevens take additional steps to further assist with the rebalancing as the central bank head favors a further depreciation in the exchange rate. The Australian Dollar tumbled lower following the surprise rate cut, with AUD/USD extending the decline to 0.7650 as the pair ended the session at 0.7634.

--- 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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