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

The Reserve Bank of Australia is anticipated to lower the official cash rate by another 25bp to 3.00% in an effort to keep the $1T economy afloat, and as the economy teeters on the brink of a recession, expectations for further easing is likely to weigh on the exchange rate over the next 24 hours of trading.

Trading the News: RBA Rate Decision

What's Expected

Time of release: 03/03/2009 03:30 GMT, 22:30 EST
Primary Pair Impact : AUDUSD
Expected: 3.00%
Previous: 3.25%

Impact the RBA Rate Decision had on AUDUSD over the last 2 quarters

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.

December 2008 RBA Rate Decision

The Reserve Bank of Australia 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.

How To Trade This Event Risk

The Reserve Bank of Australia is anticipated to lower the official cash rate by another 25bp to 3.00% in an effort to keep the $1T economy afloat, and as the economy teeters on the brink of a recession, expectations for further easing is likely to weigh on the exchange rate over the next 24 hours of trading. A Bloomberg News survey shows that 7 of the 18 economists poll forecast the RBA to deliver a 25bp cut, while 7 of the remaining participants expect the central bank to lower borrowing costs by 50bp to 2.75% even as Governor Glenn Stevens remains 'prudent' to ease policy further. Nevertheless, as economic activity deteriorates at a rapid pace, policy makers are likely to use all of their available tools to stimulate the ailing economy, and may continue to lower the benchmark interest further over the coming months as the outlook for growth and inflation falter. Earlier this week, the Bureau of Statistics reported that company operating profits fell 6.5% from the third quarter, marking its first decline in over a year, and firms are likely to hold a dour outlook for future growth as trade conditions falter. Moreover, the NAB business confidence index fell to a record low in January to reach its lowest level since 1989, while a separate report showed that job advertisement in the region fell for the ninth consecutive month in January, which raised the annual rate of unemployment to 4.8% from 4.5% in December. Meanwhile, consumer sentiment weakened further in February as the Westpac index slipped another 4.6% after falling 2.2% in the previous month, and as businesses and households turn increasingly pessimistic towards the economy, Australian policy makers are likely to push for additional measures to shore up the economy as market participants expect the region to face its first recession since 1991. At the same time, as investors remain risk adverse, the commodity bloc is likely to weaken further against the U.S. dollar as the reserve currency continues to benefit from safe-haven flows.

Expectations for a 25-50bp rate cut by the RBA clearly favors a bearish outlook for the Australian dollar however, if the central bank decides to hold the benchmark interest rate steady at the 45-year low of 3.25%, we will look to enter a long aussie-dollar trade for the given event. Therefore, if Governor Glenn Stevens remains reluctant to over-shoot the interest rate and holds a neutral outlook for the near-term, we will look for a green, five-minute candle following the decision to confirm a buy entry on two lots of AUDUSD. 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 purely on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in an effort to preserve our profits.

On the other hand, the weakening outlook for growth and inflation should allow the reserve bank to ease policy further over coming months, and as investors raise bets for lower borrowing costs, the Australian dollar is likely to face increased selling pressures if Governor Stevens leaves the door open for further rate cuts. As a result, if the RBA lowered the cash rate by 25bp or more and provides a weakening outlook for interest rates, we will look to sell the higher-yielding currency, and will follow the same strategy for a short aussie-dollar trade as the long position mentioned above, just in reverse.

DailyFX

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