The Reserve Bank of Australia rate decision will set the stage this week as Governor Glenn Stevens is anticipated to lower the benchmark interest rate by 50bp to 5.50% ahead of the ECB and BoE policy meeting on Thursday. The central bank is expected to ease policy for the third consecutive meeting as fears of a global recession continues to pose a threat to the $1T economy.
Trading the News: RBA Rate Decision
What’s Expected
Time of release: 11/04/2008 03:30 GMT, 22:30 EST
Primary Pair Impact : AUDUSD
Expected: 5.50%
Previous: 6.00% Effect the RBA Rate Decision had on AUDUSD over the past 3 releases
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.
August 2008 RBA Rate Decision
Governor Stevens following the RBA’s decision to leave rates on hold, sent a clear signal that a rate cut was imminent. The central bank kept their benchmark interest rate on hold at an 11-year high of 7.25%, but the elevated credit costs are slowing growth. As the downside risks grow and oil prices ease the MPC is moving its focus from price stability toward stimulating growth. Indeed, Governor Steven’s stated ``With demand slowing, the board's view is that scope to move towards a less restrictive stance of monetary policy in the
period ahead is increasing.'' The dovish comments would spark bearish price action that would have triggered a long trade worth at least 75 points.
How To Trade This Event Risk
The Reserve Bank of Australia rate decision will set the stage this week as Governor Glenn Stevens is anticipated to lower the benchmark interest rate by 50bp to 5.50% ahead of the ECB and BoE policy meeting on Thursday. The central bank is expected to ease policy for the third consecutive meeting as fears of a global recession continues to pose a threat to the $1T economy. Increased concerns of a sever downturn has certainly take a toll on consumers as the Westpac confidence index fell 11.0% in October to reach its lowest level in more than two years. In addition, the survey showed that consumers’ willingness to buy major household items fell at its fastest pace since recordkeeping began in 1975, indicating that private-sector consumption may weaken further over the coming months as firms continue to cutback on employment. The jobless rate in September increased to 4.3% from 4.1%, and conditions are anticipated only get worse as skilled vacancies decline 3.7% in October. Despite expectations for a rate cut this week, Credit Suisse overnight index swaps are showing that market participants anticipate the RBA to ease policy further as they expect the central bank to cut 150bp over the next 12 months, which would only stoke increased selling pressures for the Australian dollar in the near-term. In addition, narrowing demands for carry trades paired with the downturn in the financial market has certainly limited the appeal of the high-yielding currency, and the aussie may face increased selling pressures over the coming months as investors continue to curb their temperament for risk.
Despite the dour outlook for the Australian economy, retail spending increased 0.2% from August, which suggests that economic activity is holding up fairly well amid the downturn in the global economy, which should help to ease growth concerns for the RBA. Furthermore, Governor Stevens noted that risks of a ‘global catastrophe’ have diminished as a result of the extraordinary efforts taken on by policy makers around the globe, which could allow the central bank to surprise the markets by holding the benchmark interest rate steady at 6.00% or by delivering a 25bp to lower the key rate to 5.75%. Therefore, if the RBA fails to deliver a 50bp cut, we will favor a bullish outlook for the Australian dollar, and will look for a green, five-minute candle following the release to confirm a long trade for two lots of AUDUSD. 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.
However, as the major economies in the Pacific slip into a recession, the RBA may in fact lower borrowing costs by 50bp in order to avoid a sever downturn in the economy. Accordingly, an inline print would certainly favor a bearish outlook for the aussie, and we will follow the same setup for the short trade as the long trade listed above, just in reverse.