The Reserve Bank of Australia is widely expected to hold the benchmark interest rate steady at the 49-year low of 3.00% as policymakers expects a recovery later this year, and the rise in risk appetite may continue to drive the Australian dollar higher as market sentiment improves.
[B]Trading the News: Reserve Bank of Australia Interest Rate Decision[/B]
[U][B]What’s Expected[/B][/U]
Time of release: [B]06/02/2009 04:30 GMT, 00:30 EST[/B]
Primary Pair Impact : [B]AUDUSD[/B]
Expected: 3.00%
Previous: 3.00%
[U][B]Impact the RBA Rate Decision had on AUDUSD over the last 2 months[/B][/U]
[B]Period[/B]
[B]Data Released[/B]
[B]Estimate[/B]
[B]Actual[/B]
[B]Pips Change[/B]
[B](1 Hour post event )[/B]
[B]Pips Change[/B]
[B](End of Day post event)[/B]
May 2009
05/05/2009 04:30 GMT
3.00%
[B]3.00%[/B]
-4
+17
Apr 2009
04/07/2009 04:30 GMT
3.25%
[B]3.00%[/B]
+31
+60
[U]May 2009 RBA Rate Decision
[/U]
The Australian central bank held official cash rate at the 49-year low of 3.00% as expected, and the Reserve Bank of Australia may hold the interest rate steady over the near-term as they adopt a wait-and-see approach. The board minutes of the May meeting showed that the board expects the $1T economy to ‘record better outcomes than most other advanced economies in 2009 and 2010,’ and went onto say ‘that there were signs that the economic stimulus that had been applied was supporting demand.’ Moreover, RBA Governor Stevens continues to hold an improved outlook for future growth, and said that a ‘recovery will get underway toward the end of the year’ amid expectations for a 1.25% drop in the annual growth rate. At the same time, the board said that they expect ‘higher unemployment and falling inflation, though the earlier depreciation of the exchange rate would slow the decline in prices for some time.’
[U]April 2009 RBA Rate Decision[/U]
The Reserve Bank of Australia lowered the benchmark interest rate by 25bp to a 49-year low of 3.00% as the region faces its first recession since 1991, and went onto say that the extraordinary efforts taken on by policymakers will help to ‘provide significant support to domestic demand.’ Governor Glenn Stevens said that the $1T economy will contract this year, and stated that there was only room for a ‘modest adjustment’ in April after the growth rate unexpectedly fell 0.5% in the fourth quarter, which is the first contraction since 2000. Moreover, the central bank noted that demands for employment is ‘weakening,’ while ‘demand for credit is weak overall,’ and said that policymakers expect GDP ‘to fall in 2009’ as the downturn in the global economy intensifies. The comments suggests that the RBA may continue to ease policy further as growth prospects deteriorate, and may step up their efforts as trade conditions falter.
[B]
What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[U][B]Bullish Scenario:[/B][/U]
If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on AUDUSD ahead of the data release. [U][B]Bearish Scenario:[/B][/U]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on AUDUSD ahead of the data release.
[B]How To Trade This Event Risk [/B]
The Reserve Bank of Australia is widely expected to hold the benchmark interest rate steady at the 49-year low of 3.00% as policymakers expects a recovery later this year, and the rise in risk appetite may continue to drive the Australian dollar higher as market sentiment improves. However, the slump in global inflation could lead the RBA to take further steps to stem the downside risks for price growth, and the central bank may lower the cash rate further in the second-half of the year as Governor Glenn Stevens maintains a dovish outlook for future policy. A Bloomberg News survey shows that all of the 19 economists polled forecast the central bank to hold the cash rate steady this month, and long-term expectations for higher borrowing costs in the $1T economy may continue to drive demands for the high-yielding currency as the RBA anticipates a ‘recovery will get underway toward the end of the year’. A report by the Statistics bureau showed employment unexpectedly increased 27.3K in April, which lowered the jobless rate to 5.4% from 5.7% in March, while the Westpac leading economic indicator increased for the first time in seven months during March, which suggests that the economic downturn could be nearing a bottom. At the same time, a separate report showed business spending plunged 8.9% in the first quarter to mark the biggest drop since recordkeeping began in 1987, while company operating profits tumbled 7.2% during the same period, and firms may continue to scale back on production and investments as global trade conditions falter. Moreover, the TD inflation index slipped to an annual rate of 1.5% in May to fall below the central bank’s 2-3% target range for the first time in four years, while the RBA commodity index plunged 23.3% from a year earlier during the same period, fueled by falling coal and iron ore prices. As the outlook for growth and inflation remains dim, the central bank may leave the door open for lower rates over the medium-term however, as the economic activity in China, Australia’s biggest trading partner, improves, expectations for a rebound in foreign demands could encourage an improved outlook for future growth
Trading the given event risk favors a bullish outlook for the Australian dollar as investors speculate the RBA to hold rates steady over the near-term, and price action following the announcement could set the stage for a long aussie trade. Therefore, if the central bank keeps a floor on the interest rate and continues to see scope for improved growth later this year, we will look for a green, five-minute candle following the release to confirm a long entry on two-lots of AUD/USD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target,
In contrast, projections for a 1.25% drop in the annual growth rate paired with expectations for lower inflation could lead the reserve bank to stem the risks for deflation, and comments following the decision could reinforce a deteriorating outlook for future policy. As a result, if the central bank explicitly states that the benchmark interest could fall lower over the medium-term, and maintains a dovish outlook for inflation, we will favor a bearish forecast for the high-yielding currency, and we will follow the same strategy for a short aussie-dollar trade as long position mentioned above, just in reverse.
