Trading the News:Reserve Bank of Australia Interest Rate Decision

What’s Expected:

Time of release:12/06/20112:30 GMT,22:30 EST

Primary Pair Impact:AUDUSD

Expected:4.25%

Previous:4.25%

DailyFX Forecast:4.25%

Why Is This Event Important:

The Reserve Bank of Australia is widely expected to cut the benchmark interest rate by another 25bp in December, and dovish comments following the decision is likely to drag on the exchange rate as market participants see lower borrowing costs in 2012. According to Credit Suisse overnight, investors anticipate the interest rate to fall by more than 125bp over the next 12-months, and we may see the RBA carry its easing cycle into the following year as the slowing recovery dampens the outlook for growth and inflation. However, central bank Governor Glenn Stevens may talk down speculation for lower borrowing costs as China, Australia’s largest trading partner, takes steps to shore up the world’s second largest economy, and the RBA may adopt a wait-and-see approach in the first-half of the following year as world policy makers increase their efforts to shore up global growth.

Recent Economic Developments

The Upside

Release	Expected	Actual
Retail Sales s.a. (MoM) (OCT)	0.4%	0.2%
Private Sector Credit (MoM) (OCT)	0.4%	0.2%
Consumer Inflation Expectation (NOV)	--	2.5%

The Downside

Release	Expected	Actual
Company Operating Profits (QoQ) (3Q)	3.0%	4.8%
Average Weekly Wages (QoQ) (AUG)	1.1%	1.2%
Employment Change (OCT)	10.0K	10.1K

The slowdown in private sector consumption paired with the softer rate of inflation expectations may lead the RBA to extend its easing cycle, and we may see the AUD/USD give back the rally from earlier this month as market participants increase bets for lower borrowing costs. However, the ongoing improvement in the labor market paired with the pickup in wage growth may lead the central bank to adopt a wait-and-see approach as the region continues to benefit from global trade. In turn, we may see the AUD/USD extend the rebound from the November low (0.9663), and the high-yielding currency may track higher over the remainder of the month as market participants scale back expectations for lower interest rates.

Potential Price Targets For The Rate Decision

How To Trade This Event Risk

Trading the given event risk favors a bearish bias for the high-yielding currency as we expect to see another rate cut in December, but comments following the rate decision may help to prop up the Australian dollar should the RBA talk down speculation for lower borrowing costs. Therefore, if the RBA brings its easing cycle to a halt, we will need to see a green, five-minute candle following the announcement to establish 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 from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to preserve out profits.

In contrast, the slowdown in growth and inflation may lead the RBA to carry its easing cycle into the following year, and the central bank may show an increased willingness to ease policy further in 2012 as it aims to encourage a sustainable recovery. As a result, should the central bank see scope to carry its easing cycle into the following year, we will implement the same strategy for a short aussie-dollar trade as the short position laid out above, just in reverse.

Impact that the RBA Interest Rate Decision has had on AUD during the last meeting

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
NOV 2011	11/01/2011 3:30 GMT	4.50%	4.50%	-71	-211

November 2011 Reserve Bank of Australia Interest Rate Decision

The Reserve Bank of Australia eased monetary policy for the first time since 2009, with the board lowering the benchmark interest rate by 25bp to 4.50%. RBA Governor Glenn Stevens warned of a protracted recovery in Australia in light of the ‘significant’ slowdown in Europe, and went onto say that inflation is ‘likely to be close’ to the 2%-3% target as economic activity in the isle-nation cools. As the central bank adopts a highlight dovish outlook for monetary policy, we should see the RBA continue to scale back the rate hikes from 2010, and Governor Stevens may show an increased willingness to carry the easing cycle into the following year as the prospects for global growth deteriorates. Indeed, the Australian dollar tumbled lower following the announcement, with the AUD/USD slipping back below 1.0500, and the high-yielding currency continued to lose ground throughout the day as the exchange rate closed at 1.0327.

--- Written by David Song, Currency Analyst

To contact David, e-mail This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Questions? Comments? Join us in the DailyFX Forum

View the Expo Presentation on ‘Trading the News’ For Additional Resources

http://forexforums.dailyfx.com/dailyfx-education-videos-forex-trading-strategies/89952-dailyfx-trading-news.html?cmp=SFS-70160000000ELfrAAG