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AUD/USD Range Vulnerable to Dovish RBA, Slowing China

AUD/USD Range Vulnerable to Dovish RBA, Slowing China

2015-09-01 00:00:00
David Song, Shuyang Ren,
Share:

- Reserve Bank of Australia (RBA) Expected to Keep Cash Rate at 2.00%.

- Will Governor Glenn Stevens Sound More Dovish Amid Growing Concerns Surrounding China?

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Trading the News: Reserve Bank of Australia Interest Rate Decision

According to a Bloomberg News survey, all of the 27 economists polled forecast the Reserve Bank of Australia (RBA) to keep the benchmark interest rate on hold at 2.00%, but the fresh language coming out of the central bank may drag on AUD/USD should Governor Glenn Stevens adopt a more dovish outlook for monetary policy.

What’s Expected:

AUD/USD RBA

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Why Is This Event Important:

The RBA may have little choice but to scrap its wait-and-see approach amid the growing concerns surrounding China – Australia’s largest trading partner – and the aussie remains at risk of facing additional headwinds over the near to medium-term as the ongoing easing cycle in the Asia/Pacific region puts increased pressure on Governor Stevens to offer lower borrowing-costs.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Employment Change (JUL)

10.0K

38.5K

Consumer Price Index- Trimmed Mean (YoY) (2Q)

2.1%

2.2%

Retail Sales ex Inflation (QoQ) (2Q)

0.4%

0.8%

Sticky inflation along with the pickup in job growth may encourage the RBA to endorse a neutral policy stance throughout 2015, and a string of upbeat comments may heighten the appeal of the Australian dollar as market participants scale back bets for lower borrowing-costs.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Private Capital Expenditure (2Q)

-2.5%

-4.0%

NAB Business Confidence (JUL)

--

6

Building Approvals (MoM) (JUN)

-1.0%

-8.2%

However, the RBA may show a greater willingness to further embark on its easing cycle amid waning confidence paired with the ongoing contraction in business investments, and a slew of dovish rhetoric may spur fresh yearly lows in AUD/USD amid the deviation in the policy outlook.

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How To Trade This Event Risk(Video)

Bullish AUD Trade: RBA Continues to Endorse Wait-and-See Approach

  • Need green, five-minute candle following the rate decision for a potential long AUD/USD trade.
  • If market reaction favors a bullish 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 Shows Greater Willingness 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:

USDJPY-Just a Dip or Important Reversal?

NZD Fails to Retain Range- AUD Holds Support Ahead of RBA

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 for AUD/USD as price & the Relative Strength Index (RSI) retain the downward trend from earlier this year, but waiting for a close below 0.7090 (78.6% retracement) to open up the downside targets.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long AUD/USD since May 15, but the ratio appears to be working its way back towards recent extremes as it climbs to +3.03, with 75% of traders long.
  • Interim Resistance: 0.7570 (50% expansion) to 0.7590 (100% expansion)
  • Interim Support: 0.7030 (2015 low) to 0.7090 (78.6% retracement)

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)

AUG 2015

08/04/2015 4:30 GMT

2.00%

2.00%

+56

+84

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

AUD/USD Chart

As expected, the Reserve Bank of Australia (RBA) kept the benchmark unchanged at the record-low of 2.00%, with Governor Glenn Stevens largely endorsing a wait-and-see approach even as the region continues to face below-trend growth. It seems as though the RBA will largely retain its current policy stance as the central bank sees the previous rate cuts working through the real economy, but Governor Stevens may come under increased pressure to further insulate the region as the slowdown in China – Australia’s largest trading partner – dampens the outlook for growth and inflation. Nevertheless, the Australian dollar strengthened following the rate decision, with AUD/USD snapping back above the 0.7300 handle during the Asia-Pacific trade to end the session at 0.7374.

--- 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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