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Cautious RBA to Curb AUD/USD Rebound; 2016 Range Remains in Play

Cautious RBA to Curb AUD/USD Rebound; 2016 Range Remains in Play

2017-05-01 19:30:00
David Song, Strategist
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- Reserve Bank of Australia (RBA) to Keep Cash Rate at Record-Low of 1.50%.

- Will Governor Philip Lowe Continue to Tame Interest-Rate Expectations?

Trading the News: Reserve Bank of Australia Interest Rate Decision

DailyFX Calendar

Even though the Reserve Bank of Australia (RBA) is widely expected to endorse a wait-and-see approach for monetary policy, the fresh batch of central bank rhetoric may undermine the recent rebound in the aussie-dollar exchange rate should Governor Philip Lowe and Co. show a greater willingness to preserve the record-low cash rate throughout 2017.

Why Is This Event Important:

The Australian dollar struggled to hold its ground following the last meeting as the RBA warned ‘growth in household borrowing, largely to purchase housing, continues to outpace growth in household income’ and favored ‘a reduced reliance on interest-only housing loans.’ With the government operating under Prime Minister Malcolm Turnbull scheduled to announce the 2017 budget on May 9 , the central bank may attempt to buy more time and reiterate that ‘the outlook continues to be supported by the low level of interest rates’ amid the risk of derailing the economic recovery.

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Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Private Sector Credit (YoY) (MAR)

5.1%

5.0%

NAB Business Confidence (MAR)

--

6

Retail Sales (MoM) (FEB)

0.3%

-0.1%

The RBA may continue to tame expectations for higher borrowing-costs amid the rise in household indebtedness paired with the slowdown in private-sector consumption, and the Australian dollar may come under pressure should the central bank highlight a cautious outlook for the region.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Producer Price Index (YoY) (1Q)

--

1.3%

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

1.8%

1.9%

Employment Change (MAR)

20.0K

60.9K

Nevertheless, the pickup un underlying inflation accompanied by the ongoing improvement in the labor market may push the RBA to soften its dovish tone, and the AUD/USD exchange rate may stage a larger rebound over the coming days should the statement highlight a potential shift in the monetary policy outlook.

How To Trade This Event Risk(Video)

Bearish AUD Trade: RBA Tames Expectations and Sees Record-Low Rate for Foreseeable Future

  • Need a red, five-minute candle following the policy meeting to consider a short AUD/USD position.
  • If market reaction favors a bearish aussie setup, sell AUD/USD with two separate lots.
  • 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 Lowe & Co. Adopts Improved Outlook

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

Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using Trading View

  • Will keep a close eye on the monthly opening range as AUD/USD extends the rebound from the previous week, but the near-term outlook remains mired by the downward trending channel carried over from the end of March, with the Relative Strength Index (RSI) highlighting a similar dynamic as the oscillator preserves the bearish formation carried over from February; first downside hurdle comes in around 0.7450 (38.2% retracement) followed by the Fibonacci overlap around 0.7390 (38.2% retracement) to 0.7420 (61.8% retracement).
  • Interim Resistance: 0.7730 (61.8% retracement) to 0.7770 (61.8% expansion)
  • Interim Support: 0.7150 (161.8% expansion) to 0.7180 (61.8% retracement)

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Impact that the RBA rate decision has had on AUD/USD during the previous meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

APR

2017

04/04/2017 4:30 GMT

1.50%

1.50%

-30

-44

April 2017 Reserve Bank of Australia (RBA) Interest Rate Decision

AUD/USD 5-Minute

AUD/USD Chart

As expected, the Reserve Bank of Australia (RBA) kept the official cash rate at the record-low of 1.50%, but Governor Philip Lowe and Co. sounded more cautious this time around as officials warned ‘growth in household borrowing, largely to purchase housing, continues to outpace growth in household income. The Australian dollar dipped below the 0.7600 handle as the central bank argued ‘the outlook continues to be supported by the low level of interest rates,’ with AUD/USD losing ground throughout the day to close at 0.7561.

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--- Written by David Song, Currency Analyst

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

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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