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High uncertainty surrounding the RBA's interest rate decision is likely to spark volatility in the currency markets, and the Australian dollar may continue to benefit from the rise in market sentiment if the central bank signals that the benchmark interest rate has reached a bottom and plans to hold borrowing costs at the 45-year low of 3.25% going forward.
Trading the News: RBA Rate Decision
Time of release: 04/07/2009 04:30 GMT, 00:30 EST
Primary Pair Impact :AUDUSD
Impact the RBA Rate Decision had on AUDUSD over the last 2 months
March 2009 RBA Rate Decision
|The Australian central bank held the cash rate steady at the 45-year low of 3.25% amid expectations for a 25bp cut, which suggests that the RBA may keep rates on hold after taking unprecedented steps to stimulate the $1T economy. RBA Governor Stevens said that the extraordinary measures taken on by the government and the central bank will provide ‘significant support' to the economy, but went onto say that ‘weak conditions are likely to continue in the near term' as nation teeters on the brink of a recession. Despite the encouraging comments from the central head, the outlook for growth and inflation remains bleak as the downturn in the global economy intensifies, and conditions are likely to get worse as trade conditions falter. Nevertheless, as policymakers adopt a wait-and-see approach, weakening fundamentals could spark another round of easing as growth prospects deteriorate at a rapid pace.|
February 2009 RBA Rate Decision
|The RBA lowered the benchmark interest rate by 100bp to 3.25%, which is the lowest level since 1964, in an effort to keep the $1T economy afloat. In addition, the government announced that it will spend another A$42B in fiscal stimulus in response to the economic downturn in the global economy, and the central bank is expected to ease policy further in the coming months as the region teeters on the brink of a recession. Despite the extraordinary efforts taken on by policy makers, economic activity throughout the region is likely to weaken further as trade conditions deteriorate, and as the International Monetary Fund forecasts a global recession for 2009, the outlook for improved growth remains bleak. Moreover, as growth and inflation falter, the RBA is likely to lower borrowing costs further in order to avoid a deepening contraction in the economy, and may hold borrowing costs at the 45-year low for sometime in an effort to stimulate growth.|
What To Look For Before The Release
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:
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.
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.
How To Trade This Event Risk
High uncertainty surrounding the RBA's interest rate decision is likely to spark volatility in the currency markets, and the Australian dollar may continue to benefit from the rise in market sentiment if the central bank signals that the benchmark interest rate has reached a bottom and plans to hold borrowing costs at the 45-year low of 3.25% going forward. Credit Suisse overnight index swaps are showing that investors are pricing a 25bp drop in the cash rate, while a Bloomberg News Survey shows that 14 of the 23 economists polled anticipate Governor Alan Bollard will hold the rate at its current level amid projections for a rate cut between 25-50bp. Despite expectations for neutral policy, comments from the board suggests that the central bank will continue to ease policy further as they anticipate the region to face a recession for the first time in over a decade, and may indicate that rates could go lower as the downturn in the global economy intensifies. After the $1T economy unexpectedly contracted in the fourth quarter, RBA Deputy Governor Ric Battellino said that GDP is ‘likely to fall in 2009,' and went onto say that ‘there remains scope to ease policy further' as the outlook for growth and inflation falters. Earlier this week, a report by the Bureau of Statistics showed that retail sales dropped for the first time in five-months as demands plunged 2.0% from January, and the outlook for consumer spending remains bleak as households face a weakening labor market paired with falling home prices. As private consumption accounts for more than half of the economy, fears of a deepening downturn has spurred speculation that the central bank will continue to shore up the economy but nevertheless, as the government commits nearly A$88B in fiscal spending in an effort to avert a recession, the RBA may continue to take a wait-and-see approach as they expect the extraordinary efforts taken on by policymakers to provide ‘significant support' to the economy.
Long-term expectations for higher interest rate paired with the rise in risk appetite clearly favors a bullish outlook for the Australian dollar, and if the RBA keeps rate on hold and adopts a neutral policy stance going forward, we will look for a green, five-minute candle following the decision to confirm a buy 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 taking volatility into account), and this risk will determine our first target. Our second target will be based on discretion, and in an effort 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, as the economic outlook continues to reinforce a dour outlook for growth and inflation, deteriorating trade conditions paired with tightening credit conditions could lead the central bank to take further steps to stimulate the economy . As a result, if the RBA lowers the cash rate by 25bp or more, and leaves the door open for lower borrowing costs in the month ahead, we will look to sell the high-yielding currency, and will follow the same strategy for a short aussie-dollar trade as the long position mentioned above, just in reverse.
|RBA to Hold Rates Steady - Stronger Than Expectations||Easing Cycle Continues - Lower Than Expectations|