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AUD/USD Support at Risk on Dovish RBA, Toughened Verbal Intervention

AUD/USD Support at Risk on Dovish RBA, Toughened Verbal Intervention

2015-06-02 00:30:00
David Song, Shuyang Ren,
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- Reserve Bank of Australia (RBA) to Hold Benchmark Interest Rate to 2.00%.

- Will Governor Glenn Stevens Toughen the Verbal Intervention on the Australian Dollar?

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Trading the News: Reserve Bank of Australia Interest Rate Decision

According to a Bloomberg News survey, all of the 29 economists polled forecast the Reserve Bank of Australia (RBA) to keep the cash rate on hold at 2.00%, but the policy statement may drag on AUD/USD as the central bank keeps the door open to further embark on its easing cycle.

What’s Expected:

AUD/USD RBA

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Why Is This Event Important:

The dovish outlook for monetary policy along with the ongoing verbal intervention on the Australia dollar certainly raises the risk of for a further decline in the exchange rate, and we may see Governor Glenn Stevens increase his efforts to further support the rebalancing of the real economy in order to encourage a stronger recovery.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Private Capital Expenditure (1Q)

-2.2%

-4.4%

Retail Sales ex Inflation (QoQ) (1Q)

0.8%

0.7%

Trade Balance (MAR)

-1000B

-1322M

The ongoing decline in business investments paired with slowing demand from home and abroad may encourage the RBA to adopt a more dovish tone, and the aussie remains at risk of facing additional headwinds over the near-term as the central bank sees scope to further reduce the cash rate if needed.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Company Operating Profits (QoQ) (1Q)

0.0%

0.2%

Consumer Inflation Expectation (MAY)

--

3.6%

Consumer Price Index- Trimmed Mean (YoY) (1Q)

2.2%

2.3%

However, the RBA may retain its wait-and-see approach in June on the back of sticky price growth, and Governor Stevens may endorse a more neutral outlook for monetary policy as the pickup in inflation expectations limits the central bank’s scope to further support the real economy.

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How To Trade This Event Risk(Video)

Bearish AUD Trade: RBA Retains Dovish Tone & Toughens Verbal Intervention

  • 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 Highlights Neutral Outlook

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

Read More:

Euro Bearish Outlook Mired by Greek Talks, Sticky CPI

Scalp Webinar: Key Levels on USD Crosses in Focus Ahead of NFP

Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Following the failed run at the January high (0.8294), AUD/USD remains at risk for a further decline amid the bearish formation in price & RSI.
  • DailyFX Speculative Sentiment Index (SSI) shows retail crowd remains net-long AUD/USD since May 15, with the ratio approaching extremes as it climbs to +2.61.
  • Interim Resistance: 0.7820 (38.2% retracement) to 0.7850 (61.8% expansion)
  • Interim Support: 0.7570 (50% expansion) to 0.7590 (100% expansion)

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 2015

05/05/2014 4:30 GMT

2.00%

2.00%

+66

+18

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

AUD/USD Chart

As expected, the Reserve Bank of Australia (RBA) cut the benchmark rate for a second time in 2015 to a fresh record-low of 2.00% in May, but largely refrained from laying out a new forward-guidance for monetary policy as the central bank retained the verbal intervention on the local currency. With that said, it seems as though the RBA will adopt a wait-and-see approach over the coming months as the rate cuts continue to work their way through the real economy. The initial market reaction to the rate cut was short-lived as the RBA scaled back its dovish forward-guidance for monetary policy, with AUDUSD quickly snapping back from the 0.7800 handle to end the Asia/Pacific trade at 0.7867.

--- 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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