Tomorrow the Reserve Bank of Australia (RBA) will release the opening salvo of the central banks’ monetary policy decisions this month. What can you expect from the forex event?
Why should I trade this 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 month?
In a near carbon copy of its previous announcement, the RBA has decided to keep its interest rates steady at 2.00%. Apparently, while the central bank is worried over global market stability and demand, it’s also optimistic that the economy is successfully transitioning away from mining-related activities.
The RBA shared that global economic growth has been growing at a slower-than-expected pace and that growth in China, its largest trading partner, continues to moderate. On the plus side, Glenn Stevens and his gang were pretty happy about the non-mining sector, saying that it has expanded despite the contraction in the mining industry.
What caught the investors’ attention was the RBA’s lack of jawboning. Instead of its usual comments about the Aussie being “too high,” the central bank simply said that it the exchange rate “has been adjusting to the evolving economic outlook.” Could it be that the RBA just didn’t want to get rapped on the knuckles again?
Overall the central bank believes that its current policies “remained appropriate,” but cautioned that continued low inflation would provide scope for further easing. It’s also keeping close tabs on employment conditions and global financial trends for their possible impact on global and domestic demand.
What are market players expecting this time?
Tomorrow at 4:30 am GMT, the RBA is widely expected to keep its rates at a record low of 2.00%. Don’t dismiss the release as a non-event though!
Volatility hunters are expecting to see some action from the details of the report. More specifically, they will be looking closely at how the Fed’s recently dovish tone has affected the RBA’s stance on the Aussie’s strength.
See, many believe that the central bank members have been shrugging off AUD/USD’s strength (their comfort zone is at around .6500) because they expect that the Fed’s tightening would drag it back down. Now that Yellen and her gang aren’t as hawkish as expected, will Glenn Stevens go back to jawboning the currency?
How might AUD/USD react?
Back in February, AUD/USD capped the day 80 pips lower than its open price when traders chose to focus on falling oil prices and the RBA’s concerns over China and the global economy. Then, last month, AUD/USD had dug itself back up from its Asian session lows and closed 50 pips higher when the RBA had refrained from commenting on the Aussie’s strength.
More optimism from the RBA could boost the Aussie further against the Greenback, while a bit of jawboning could inspire fresh talks of more rate cuts from the central bank. Last but not least, keep an eye out for other catalysts, as a lack of changes from the central bank could lead to traders paying attention to other market movers instead.