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AUD/USD: Trading the Reserve Bank of Australia's Rate Decision

Tue, Dec 2 2008, 06:21 GMT
by Daily FX Research Team

DailyFX

The Reserve Bank of Australia is widely expected to lower the benchmark interest rate to 4.50% from 5.25% as the growth outlook for the $1T economy turns bleak. A Bloomberg News survey showed that 15 of the 21 economists polled forecasts policymakers to deliver a 75bp rate cut as policymakers lowered their growth forecast to 1.5% from 2.0%.

Trading the News: RBA Rate Decision

What’s Expected

Time of release: 12/02/2008 03:30 GMT, 22:30 EST

Primary Pair Impact : AUDUSD

Expected: 4.50%

Previous: 5.25%

Effect the RBA Rate Decision had on AUDUSD over the past 3 releases

November 2008 RBA Rate Decision

The RBA reduced the key interest rate by 75bp to a three-year low of 5.25% from 6.00% despite expectations for a 50bp cut.
The minutes of the November 4th policy meeting showed that the central bank decided to take a preemptive move to support economic activity as they expected the spillover effects of the financial crisis to ‘have a significant effect on business and consumer sentiment,’ which raised speculation that the policymakers may continue to ease policy further over the coming months as fears of a global recession intensify.
Moreover, the reserve bank expects economic activity to remain subdued well into the next year as the emerging economies around the Pacific find themselves in troubled waters, and may prompt policymakers to lower borrowing costs even further as demands from the global economy deteriorate.

October 2008 RBA Rate Decision

The Reserve Bank of Australia lowered the benchmark interest rate by 100bp for the first time since 1992 as fears of a global meltdown intensified. The RBA minutes showed that the central bank slashed borrowing costs for the second consecutive meeting to lower the interest rate to 6.00%, stating that the unexpected move was ‘appropriate’ in order to stave off further downturns in the $1T economy. Meanwhile, Governor Glenn Stevens said that the risk of a ‘global catastrophe’ has died down as a result of the extraordinary efforts taken on by policy makers worldwide, but has raised speculation that the RBA will continue to ease policy further as the major economies around the world slip into a recession.

September 2008 RBA Rate Decision

Comments by RBA Governor Stevens following the 25bp rate cut to 7.00% in September indicates that the bank will hold a dovish outlook going forward, and suggests that bank may consider lowering the benchmark interest further as growth prospects deteriorate. Falling commodity prices paired with mounting downside growth risks has led the Reserve Bank of Australia to lower borrowing costs for the first time since the end of 2001, with Governor Stevens holding a dour outlook for the $1 trillion economy as he predicts tightening credit conditions to force business and consumers to cutback on borrowing, and anticipates private-sector spending to weaken in the months ahead. He went on to note that he also anticipates the unemployment rate to rise throughout 2009, which only strengthens the argument that the central bank will look to lower rates further in the near-term.

How To Trade This Event Risk

The Reserve Bank of Australia is widely expected to lower the benchmark interest rate to 4.50% from 5.25% as the growth outlook for the $1T economy turns bleak. A Bloomberg News survey showed that 15 of the 21 economists polled forecasts policymakers to deliver a 75bp rate cut as policymakers lowered their growth forecast to 1.5% from 2.0%. The Westpac leading indicator fell 1.0% to 258.4 in September as economists cut the annualized rate of growth to 1.1% from 2.5% in August, and growth prospects for the economy may deteriorate further over the coming months as demands from home and abroad deteriorate. Retail spending rose 0.1% in the third quarter despite expectations for a 0.4% increase, and private-sector consumption may remain subdued well throughout the next year as economic activity falters. Manufacturing activity in Australia contracted for the sixth consecutive month in November as the index plunged to a record low of 32.7 from 40.4 in the previous month as new orders slipped to 24.5 from 38.9, while the employment components fell to 33.2 from 37.6. In addition, service-based activity fell for the seventh straight month in October as the index fell to 42.1 from 44.9 in the prior month. Fading demands have certainly take a toll on firms as business confidence slumped to -29 from -8 in September to reach its lowest reading since recordkeeping began in 1989, and conditions may only get worse over the coming months as market participants expect the economy to slip into a recession for the first time since 1991.
Deteriorating fundamentals paired with falling commodity prices have certainly dragged on the Australian dollar, and the high-yielding currency may face increased selling pressures following the rate decision as investors continue to curb their appetite for risk.

Despite expectations for a 75bp rate cut to 4.50%, RBA Governor Glenn Stevens stated that he believes a cash rate between 5.50-6.00% to balance the central bank’s dual mandate, and went on to say that ‘the question will be whether we need to be on the expansionary side of neutral given’ the current conditions in the credit market. Increased speculation that the central bank will hold a neutral policy stance over the near-term could stoke increased buying pressures for the Australian dollar, and any supporting arguments for a neutral outlook following the decision will set the stage for a long Australian dollar position. With our expectations at hand, we will look for a will look for a green, five-minute candle following the release to confirm a long trade for two lots of AUD/USD.
We will then 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 base on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

On the other hand, deteriorating fundamentals paired with the drastic slowdown in the global economy has certainly heighten the downside risks for growth, and may lead the central bank to hold a dovish outlook on inflation as price pressures alleviate. As a result, a 50bp rate cut or greater would favor a bearish outlook for the aussie, and we will follow the same setup for the short as the long trade listed above, just in reverse.

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Forex Technical and Fundamental Forecasts for December

Published on  Tue, Dec 2 2008, 08:06 GMT