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Dovish Reserve Bank of Australia (RBA) to Undermine AUD/USD Rebound

Dovish Reserve Bank of Australia (RBA) to Undermine AUD/USD Rebound

David Song, Shuyang Ren,

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

- Will Governor Glenn Stevens Keep the Door Open for Lower Borrowing-Costs?

Trading the News: Reserve Bank of Australia Interest Rate Decision

According to a Bloomberg News survey, 28 of the 29 economists polled forecast the Reserve Bank of Australia (RBA) to keep the official cash rate on hold at 2.00%, but the policy statement may produce near-term headwinds for AUD/USD should the central bank show a greater willingness to further insulate the real economy.

What’s Expected:

AUD/USD RBA

Click Here for the DailyFX Calendar

Why Is This Event Important:

Even though the RBA carries its wait-and-see approach into 2016, the ongoing easing cycle in the Asia/Pacific region may push Governor Glenn Stevens to adopt a more dovish outlook for monetary policy in an effort to encourage a stronger recovery.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

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

2.1%

2.1%

Home Loans (MoM) (NOV)

-0.5%

1.8%

Retail Sales (MoM) (NOV)

0.4%

0.4%

Sticky price growth accompanied by the expansion in private-sector consumption may keep the RBA on the sidelines throughout 2016, and more of the same from Governor Stevens and Co. may fuel a larger rebound in AUD/USD as the central bank continues to defy market expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

AiG Performance of Manufacturing (JAN)

--

51.5

NAB Business Confidence (DEC)

--

3

AiG Performance of Services (NOV)

--

46.3

However, the ongoing contraction on business outputs may prompt the RBA to take a more proactive approach in combating the ‘below-trend’ growth in Australia, and the aussie-dollar stands at risk of giving back the rebound from the previous month should the central bank look to implement lower borrowing-costs over the coming months.

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 to Implement More Rate-Cuts

  • 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:

GBP/USD – All About 1.4400

AUDJPY Following 2016 Trade Plan- Time to Reload

USD/JPY Technical Analysis: Upside Risks Heightened Before BoJ (Levels)

COT-Trend Traders Hold Record Net Short Position in Copper

Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • The bearish formation in price & the Relative Strength Index (RSI) continues to foster a long-term bearish outlook for AUD/USD, with the pair at risk of carving at near-term top amid the string of failed attempts to close back above the 0.7080 (38.2% expansion) to 0.7090 (78.6% retracement).
  • DailyFX Speculative Sentiment Index (SSI) shows the retail has flipped back to net-long AUD/USD ahead of the RBA meeting, with the ratio climbing to +1.06 as 52% of traders are now long.
  • Interim Resistance: 0.7380 (50% retracement) to 0.7390 (78.6% expansion)
  • Interim Support: 0.6830 (161.8% expansion) to 0.6860 (61.8% 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)

DEC 2015

12/02/2015 03:30 GMT

2.00%

2.00%

+10

+22

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

AUD/USD Chart

As expected, the Reserve Bank of Australia (RBA) retained the cash rate at 2.00%, but kept the door open to further embark on its easing cycle as the region continues to face ‘below-trend’ growth. Nevertheless, it seems as though Governor Glenn Stevens will largely endorse a wait-and-see approach in 2016 as the central bank head appears to be in no rush to further insulate the real economy. The Australian dollar gained ground following the rate decision, with AUD/USD bouncing off of the 0.7250 region to close the Asian/Pacific session at 0.7276.

Get our top trading opportunities of 2016 HERE

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

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

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

To be added to David's e-mail distribution list, please follow this link.

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