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Gather ’round, folks! The Reserve Bank of Australia (RBA) is set to make its last monetary policy decision for the year on Tuesday, so let’s figure out how we can make some pips off this economic event.

Why is the RBA statement important?

If you’ve been a good student in our School of Pipsology, you’d definitely know that the correct answer to this question is that interest rates make the forex world go ’round! As discussed in the Interest Rates 101 lesson, rate changes typically have a direct effect on demand for a currency, and this plays a major role in driving forex price action.

RBA policymakers schedule their monetary policy meetings 11 times a year and announce their rate decision usually on the first Tuesday of the month. Aside from deciding whether to cut or hike rates, the RBA also comments on current economic conditions and gives their outlook for the Australian economy.

What can we expect for its December statement?

The RBA is set to make its next rate statement on December 4, 2012 (3:30 am GMT). Based on a survey conducted by Bloomberg News, 19 out of 28 economists are expecting the central bank to cut rates by 0.25% and bring its cash rate to 3.00% – its lowest level since 2009!

The reason behind this downbeat outlook is that, save for the mining industry, the rest of the Australian economy hasn’t shown much improvement over the past few months. In fact, even though the mining sector posted growth lately, the pace of expansion seems to be slowing down.

On top of that, external threats to the economy are still very much present. For one thing, the uncertainty and pessimism surrounding the U.S. fiscal cliff could weigh on Australia’s raw material and fuel exports. This has resulted in weaker business sentiment and a softer medium-term outlook for the Land Down Under.

But of course, at this point in time, a rate cut is anything but a done deal. After all, there are still a couple of reasons for the RBA to hold off on slashing interest rates, which is probably why 9 out of the 28 economists that participated in the Bloomberg survey believe that the central bank will keep its cash rate at 3.25%.

First of all, RBA Governor Glenn Stevens has said in the past that the economy has yet to feel the full effects of previous rate cuts. Now, I don’t know about you but this tells me that Stevens may be interested in giving these previous cuts more time to kick in before setting out to slash rates once again.

Secondly, the economy isn’t at critical levels yet, so there’s no need to take desperate measures. Cutting rates now may deprive the RBA of that option later on, should things take a turn for the worse next year. In other words, the central bank runs the risk of having an empty bag of tricks when it needs it most.

Impact on AUD/USD

In the past, the RBA rate statement has caused huge moves on AUD/USD. In October, it led to a quick 50-pip drop as the RBA surprised the markets with a 0.25% rate cut. And just last month, the central bank’s decision to keep rates at 3.25% immediately resulted in a 60-pip rally.

AUD/USD October 2, 2012

AUD/USD November 6, 2012

So if the past two rate statements are anything to go by, we’re in for quite some action tomorrow!

Now remember, even though a rate cut of 0.25% is widely expected, it doesn’t have a full consensus. As I said earlier, only 19 out of 28 predict a rate cut, and that’s far from a unanimous decision. With uncertainty surrounding the decision, we could see a sharp move on AUD/USD, regardless of the outcome.

But also keep in mind that since many are expecting the RBA to slash rates, a decision to keep rates at 3.25% would come as a bigger surprise (and thus may result in a bigger move) than a cut to 3.00%. Whichever way the market goes, it seems like the best way to trade this event is to enter early and aim for 50 pips or so, as the market tends to make the bulk of its move within the first 15 minutes.