FX - AUD/USD: Trading the Reserve Bank of Australia Interest Rate Decision

Trading the News: Reserve Bank of Australia Interest Rate Decision

What’s Expected:

Time of release: 09/06/2011 4:30 GMT, 0:30 EST

Primary Pair Impact: AUDUSD

Expected: 4.75%

Previous: 4.75%

DailyFX Forecast: 4.75%

Why Is This Event Important:

In light of the slowing recovery, the Reserve Bank of Australia is widely expected to keep the benchmark interest rate at 4.75%, and the central bank may endorse a wait-and-see approach for the remainder of the year in an effort to balance the risks for the region. Recent comments from Governor Glenn Stevens suggest we will see the RBA strike a balance tone for future policy, and the RBA may keep the door open to raise borrowing costs further as government officials see underlying inflation rising above the 2 to 3 percent target range over the near-term.

At the same time, the central bank may look to abandon its ‘mildly restrictive’ policy, and Mr. Stevens may adopt a cautious outlook for the region as the ongoing turmoil in the global economy dampens the prospects for growth and inflation. According to Credit Suisse overnight index swaps, market participants see borrowing costs in Australia falling by more than 100bp over the next 12-months, and speculation for lower interest rates may gather pace should the central bank continue to highlight the weakness in the real economy.

Recent Economic Developments

The Upside

The Downside

The expansion in private sector consumption paired with the rise in wage growth may encourage the RBA to raise its fundamental assessment for the region, and the AUD/USD may show a bullish reaction to the rate decision should the central bank talk down speculation for lower borrowing costs. However, the drop in employment along with the slowdown in global trade may lead the central bank to adopt a dovish outlook for monetary policy, and expectations for a rate cut could lead the aussie-dollar to give back the advance from the previous month as interest rate expectations falter. As the AUD/USD appears to be carving out a near-term top ahead of 1.0800, the reversal from 1.0763 may gather pace in the days ahead, and the exchange rate may fall back towards near-term support around 1.0400.

Potential Price Targets For The Rate Decision

How To Trade This Event Risk

Trading the given event risk is certainly not as clear cut as some of our previous trades, but comments following the rate decision could set the stage for a long Australian dollar trade should the RBA talk down speculation for lower interest rates. Therefore, if the central bank maintains a neutral outlook for monetary policy, we will need to see a green, five-minute candle following the announcement to generate a buy entry on two-lots of AUD/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, the slowdown in economic activity paired with the easing risk for inflation may lead the RBA to drop its ‘mildly restrictive’ policy in order to balance the risks for the region. As a result, if the central bank shows an increased willingness to bring down the cash rate from 4.75%, we will implement the same strategy for a short aussie-dollar trade as the long position laid out above, just in the opposite direction.

Impact that the RBA Interest Rate Decision has had on AUD during the last meeting

August 2011 Reserve Bank of Australia Interest Rate Decision

The Reserve Bank of Australia said it was ‘prudent to maintain the current setting of monetary policy’ after holding the benchmark interest rate at 4.75% in August for eight consecutive meetings, and the central bank looks as though it will preserve a wait-and-see approach throughout the remainder of the year given the ‘acute sense of uncertainty’ in the global financial markets.’ However, it seems as though the RBA may abandon its ‘mildly restrictive’ policy as the meeting minutes highlight a growing risk for a slower recovery, and Governor Glenn Stevens may continue to soften his hawkish tone for future policy as the weakness in the real economy dampens the outlook for inflation. In turn, the RBA may scale back borrowing costs in an effort to balance the risks for the isle-nation, and the central bank may adopt a dovish outlook for monetary policy as growth and inflation cools. Indeed, the AUD/USD sold off following the rate decision, with the exchange rate extending the decline from earlier this week, and the aussie-dollar tumbled lower throughout the day as the exchange rate settled at 1.1077 at the end of the day.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com