Forex Trading Guide: RBA’s Monetary Policy Decision

Now that the BOC, ECB, BOJ, RBNZ, and the Fed have had their say, it’s time to put the forex spotlight on the RBA! How can you make pips from its monetary policy decision this week?

Why should I trade this event anyway?

Good question, my young padawan. Forex traders tend to listen to central banks like the Reserve Bank of Australia (RBA), mostly because they’re the big bosses of interest rates and local money supply.

Hints of easy policies usually mean that the economy is in trouble, at least enough to need some boosting (yikes!) or lower interest rates (double yikes!). Meanwhile, hints of hawkish policies could mean higher interests for holding local currencies (yay!) and that the economy is in good enough shape to reduce government stimulus (double yay!).

What did the RBA say last time?

The last RBA announcement happened on December 1 when Governor Glenn Stevens and his gang decided to keep interest rates steady at 2.00% for the 8th month in a row.

Like in the previous month’s decision, the RBA chose to highlight improvements in the economy. This includes optimism over the improving conditions in non-mining sectors, steady growth in the employment sector, and the decreased threats of volatility in the financial markets. However, the central bank has once again emphasized its worries over low commodity prices and repeated its mantra that the current inflation trend “affords scope for further easing.”

What’s expected this time?

Interest rate junkies aren’t seeing any policy changes from the central bank, but a good number are expecting some dovish remarks (or at least less optimism) from its statement last December.

On one hand, the central bank is expected to recognize developments in housing credit, employment, and non-mining exports. On the other hand, the RBA might be pressured to react to lower oil prices, weaker global growth outlook, and higher market volatility compared to its last decision. Not only that, but inflation also hasn’t gone anywhere, and might urge the RBA to keep its “scope for further easing” rhetoric.

Other major central banks may also factor into the mix, as the BOC, RBNZ, Fed, ECB, and the BOJ recently published dovish remarks. Heck, the last two are even playing around with NEGATIVE interest rates!

How might AUD/USD react?

Like in its November decision, Aussie traders bought into the RBA’s optimism and pushed the comdoll higher across the board. AUD/USD capped the day 101 pips higher (+1.40%) and remained at its weekly highs until the end of the week.

Another round of optimistic comments from the RBA could further boost AUD/USD higher in the charts. After all, the pair has already gained momentum after hitting bottom at .6850 when concerns over China’s equities markets have abated. An optimistic RBA would hint that the central bank is more confident over Australia’s economic developments than worried over global factors like volatile equities markets and lower commodity prices.

If the RBA decides to adopt a more cautious tone, though, or cuts its rates surprisingly, then the Aussie is at risk of breaking its uptrend or even losing a chunk of its gains from back in mid-January. A dovish statement would put the RBA on the camp of other central banks considering easier policies and might weaken the Aussie against the currencies of more hawkish central banks like the Fed.

What do you think? Will the RBA keep its optimistic tone or adopt a more cautious one this month? Read my recent snapshot of the Australian economy if you want to be more prepared for trading the event!