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: 07/05/2011 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:

Market participants anticipate the Reserve Bank of Australia to keep the benchmark interest rate at 4.75% in July, and currency traders are likely to show a bearish reaction to the rate decision should the central bank continue to endorse its ‘mildly restrictive’ policy for the remainder of the year. According to a Bloomberg News survey, all of the 28 economists polled forecast the RBA to carry its current policy into the second-half of 2011, and Governor Glenn Stevens may strike a balanced tone given the uneven recovery in the isle-nation. However, the central bank head may reiterate that monetary policy will have to be tightened further at ‘some point’ as higher commodity prices continue to raise the risk for inflation, and the near-term rally in the Australian dollar may gather pace should Mr. Stevens talk up speculation for higher interest rates.

Recent Economic Developments

The Upside

The Downside

As the RBA expects the region to benefit from the rebuilding efforts, heightening price pressures may encourage the central bank to adopt a hawkish tone for future policy, and Mr. Stevens may see scope to deliver a rate hike in the second-half of the year as the headline reading for inflation breaches 3%. However, the slowdown in world trade paired with the ongoing weakness within the private sector may lead the RBA to support the economy throughout the remainder of the year, and the policy statement could dampen the prospects for higher interest rates should the central bank continue to highlight the downside risks for the region. As the AUD/USD faces range-bound price action, the exchange rate may consolidate in the days ahead, and the pair may make another run at 1.0400 as interest rate expectations deteriorate.

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 hawkish comments from the RBA could pave the way for a long Australian dollar trade as interest rate expectations gather pace. Therefore, if Governor Stevens talks up speculation for a rate hike later this year, we will need a green, five-minute candle following the policy statement in order to establish 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 after taking market volatility into account, and this risk will generate 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 protect our profits.

On the other hand, the uneven recovery paired with slow down in global trade may lead the RBA to endorse its mildly restrictive policy for the second-half of the 2011, and a balanced statement could bear down on the exchange rate as investors scale back speculation for a rate hike later this year. As a result, if the central bank softens its outlook for inflation and continues to highlight the ongoing weakness in the economy, we will carry out the same setup for a short aussie-dollar trade as the long position laid out above, just in reverse.

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

June 2011 Reserve Bank of Australia Interest Rate Decision

The Reserve Bank of Australia kept the benchmark interest rate at 4.75% in June, and said the board ‘judged that it would be prudent’ to retain its current policy in light of the uncertainties surrounding the global economy. Nevertheless, the RBA repeated that ‘further tightening in monetary policy would be necessary at some point’ as higher commodity prices continue to heighten the risk for inflation, but the central bank went onto say that ‘activity remained quite subdued in some other important parts of the economy’ as the region copes with the aftermath of the natural disasters from earlier this year. As the region faces an uneven recovery, RBA Governor Glenn Stevens may continue to endorse the ‘mildly restrictive’ policy stance in the second-half of the year, and the Australian dollar may continue to lose ground over the near-term as interest rate expectations falter. Indeed, the neutral tone held by the RBA sparked a bearish reaction in the aussie, with the AUD/USD slipping back below 1.0700, but the pair certainly recouped the losses during the North American trade as the exchange rate settled at 1.0720.

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