The Reserve Bank of Australia is widely anticipated to hold the benchmark interest rate at 3.00% for the sixth consecutive month in October as the central bank anticipates the economy to expand at an annual rate of 0.5% this year, and long-term expectations for higher borrowing costs is likely to drive the exchange rate higher as investors speculate the board to tighten policy over the next 12 months.
[U][B]Trading the News: Reserve Bank of Australia Interest Rate Decision[/B][/U]
[U][B]What’s Expected[/B][/U]
Time of release: [B] 10/06/2009 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]
[U]September 2009 RBA Interest Rate Decision[/U]
Australia’s central bank kept borrowing costs at the 49-year low for the fifth month in September in order to foster a sustainable recovery, and the board is likely to maintain a neutral policy stance going forward as RBA Governor Glenn Stevens hold an improved outlook for growth and inflation. The central bank head said economic activity has been “stronger than expected” and sees limited risk for inflation to hold below the 2-3% target, and went onto say that the interest rate “remains appropriate for the time being” as the $1T recovers from the global downturn. As a result, Mr. Stevens held a hawkish tone and claimed that the interest rate will have to raise from the emergency level as the central bank forecasts the economy to expand 0.5% this year, and expectations for higher borrowing costs is likely to push the exchange rate higher as investors speculate the board to tighten policy in the following year.
[U]August 2009 RBA Interest Rate Decision[/U]
The Reserve Bank of Australia held the benchmark interest rate at 3.00% for the fourth consecutive month in August, and the central bank is likely to maintain a neutral policy throughout the second-half of the year as the outlook for growth and inflation improves. RBA Governor Glenn Stevens said that the $1T economy is stronger than the board had initially expected, “with both consumer spending and exports notable for their resilience,” and went onto say that the rebound in economic confidence “suggests the risk of a severe contraction in the Australian economy has abated.” As a result, the central bank head stated that the current policy “is appropriate given the economy’s circumstances,” and market participants speculate the RBA to tighten policy over the next 12-months as policy makers anticipate economic activity to improve over the coming months.
[B]What To Look For Before The Release
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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:
[B]How To Trade This Event Risk [/B]
The Reserve Bank of Australia is widely anticipated to hold the benchmark interest rate at 3.00% for the sixth consecutive month in October as the central bank anticipates the economy to expand at an annual rate of 0.5% this year, and long-term expectations for higher borrowing costs is likely to drive the exchange rate higher as investors speculate the board to tighten policy over the next 12 months. A Bloomberg News survey shows 19 of the 20 economists polled forecast the RBA to hold the cash rate steady at the 49-year low, while Credit Suisse overnight index swaps show investors are pricing a 60% change for a 25bp rate hike as the outlook for growth and inflation improves. Economic activity in the second quarter expanded 0.6% from the first three-months of the year, with the annual rate of growth increasing 0.6% from the previous year, while consumer inflation expectations held at 3.5% from the second month in September, which is the highest reading since October 2008. Moreover, business confidence jumped to six-year high in August, with consumer sentiment improving for the fourth month in September, and the rebound in economic confidence reinforces an enhanced outlook for the region as the government takes unprecedented steps to shore up the economy. However, a report by the Bureau of Statistics showed the trade deficit widened to A$1.56B in July as exports slipped 1.0% while imports jumped 4.0%, and businesses may keep a lid on production and employment throughout the second-half of the year in an effort to weather the downturn in global trade. The Australian economy lost 27.1K jobs in August amid forecasts for a 15.0K drop in employment, while dwelling starts unexpectedly fell 3.7% from the first three-months of the year to mark the fourth straight quarterly decline, and households may turn increasingly pessimistic towards the economy as they face a weakening labor market. As a result, Treasury Secretary Ken Henry argued that “significant challenges remain” following the slump in employment paired with the downturn in income growth, and stated that “the government’s stimulus spending reach its peak in the June quarter, when the economy unexpectedly expanded 0.6%.” Furthermore, Secretary Henry said that economic activity “is still expected to be sluggish going forward,” and argued that “withdrawing the stimulus more quickly would risk stalling the economy and causing a steeper rise in the unemployment rate.” At the same time, RBA Governor Glenn Stevens said that the expansion in monetary and fiscal policy “will need to be unwound as private demands increase,” but went onto say that “it was hard to disentangle the contribution that Asian demand, fiscal stimulus and easier monetary policy had each made to the better-than-expected outcomes,” and the comments suggests that the central bank will maintain a neutral policy stance going forward as economic outlook remains uncertain.
Trading the given event risk may not be as clear cut as some of our previous trades as market participants forecast the RBA to hold borrowing cost at 3.00% for the sixth month but nevertheless, an unexpected shift in policy is likely to move the currency market as investors speculate the central bank to tighten policy over the coming months. Therefore, if the central bank holds a hawkish outlook for future policy or surprises the markets with a 25bp rate hike, we will look for a green, five-minute candle subsequent to the rate decision to generate a buy entry on two-lots of AUD/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second objective 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 order to preserve our profits.
In contrast, fears of a slower recovery paired with the downturn in the labor market may lead the central bank to maintain a cautious outlook for the economy, and price action following dovish rhetoric could set the stage for a short AUD/USD trade. As a result, if the RBA holds the benchmark interest at 3.00% and curbs expectations for a rate hike, we will favor a bearish outlook for the Australian dollar, and will follow the same strategy for a short aussie-dollar trade as the long position mentioned above, just in reverse.
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To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]