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AUD/USD Rally to Unravel on Wait-and-See RBA

AUD/USD Rally to Unravel on Wait-and-See RBA

David Song, Strategist

- Reserve Bank of Australia (RBA) to Hold Cash Rate at Record-Low of 1.50%.

- Will Governor Philip Lowe & Co. Alter the Monetary Policy Outlook?.

- Sign Up and Join DailyFX Currency Strategist Ilya Spivak LIVE to Cover the RBA Rate Decision.

Trading the News: Reserve Bank of Australia (RBA) Interest Rate Decision

RBA Interest Rate Decision

The Reserve Bank of Australia (RBA) interest rate decision may generate a bearish reaction in AUD/USD if the central bank shows a greater willingness to retain the record-low cash rate throughout 2017.

Why Is This Event Important:

The downtick in the Consumer Price Index (CPI) may encourage the RBA to endorse a wait-and-see approach especially as ‘consumption growth remains subdued, reflecting slow growth in real wages and high levels of household debt.’ In turn Governor Philip Lowe and Co. may tame market expectations and attempt to buy more time as ‘the outlook continues to be supported by the low level of interest rates.

Nevertheless, there’s growing speculation the RBA is preparing to move away from its easing-cycle as officials now forecast ‘a neutral nominal cash rate of around 3½ per cent.’ In turn, the near-term rally in AUD/USD may gather pace over the coming months should the central bank adopt a hawkish outlook for monetary policy and prepare Australian households and businesses for higher borrowing-costs.

Impact 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)

JUL

2017

07/04/2017 04:30:00 GMT

1.50%

1.50%

-68

-74

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

AUD/USD 5-Minute Chart

AUD/USD Chart

DailyFX 3Q Forecasts Are Now Available

As expected, the Reserve Bank of Australia (RBA) kept the official cash rate at 1.50% in July, and the central bank appears to be in no rush to move away from the record-low rate as officials warn ‘wage growth remains low, however, and this is likely to continue for a while yet.’ Moreover, Governor Philip Lowe and Co. continued to note ‘growth in housing debt has outpaced the slow growth in household incomes’ as Australian households and businesses continue to adjust to the economic transition, and the RBA may preserve the current stance throughout 2017 as ‘indicators of the labour market remain mixed.’ The Australian dollar lost ground following the cautious statement, with AUD/USD slipping below 0.7650 region to end the day at 0.7605.

How To Trade This Event Risk(Video)

Bearish AUD Trade: More of Same from Governor Lowe & Co.

  • Need a red, five-minute candle subsequent to the policy statement to favor a long AUD/USD trade.
  • If the market reaction favors a bearish aussie trade, 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: Headline & Core Inflation Disappoint

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

Potential Price Targets For The Release

AUD/USD Daily Chart

AUD/USD Daily Chart

Chart - Created Using Trading View

  • The shift in AUD/USD behavior may continue to unfold in the second-half of the year as the pair breaks out of the 2016-range, with the topside targets still on the radar as the Relative Strength Index (RSI) sits in overbought territory; need a close above 0.8020 (38.2% expansion) to open up the next region of interest around 0.8150 (100% expansion).
  • However, a textbook RSI sell-signal may emerge over the coming days amid the string of failed attempts to close above the 0.8020 (38.2% expansion) hurdle, and the momentum indicator may threaten the bullish formation carried over from May should the pair work its way back towards the Fibonacci overlap around 0.7850 (38.2% retracement) to 0.7860 (61.8% expansion).
  • Interim Resistance: 0.8270 (38.2% retracement) to 0.8295 (2015-high)
  • Interim Support: 0.7720 (23.6% retracement) to 0.7740 (78.6% expansion)
AUD/USD Sentiment

Track Retail Sentiment with the New Gauge Developed by DailyFX Based on Trader Positioning

Retail trader data shows 32.4% of traders are net-long with the ratio of traders short to long at 2.09 to 1. In fact, traders have remained net-short since Jun 04 when AUDUSD traded near 0.74405; price has moved 7.5% higher since then. The number of traders net-long is 2.7% higher than yesterday and 11.9% higher from last week, while the number of traders net-short is 5.2% higher than yesterday and 13.4% lower from last week.

--- Written by David Song, Currency Analyst

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.

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

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