Will The RBA Cut Rates This Week?

(synth swish) – Hi, and welcome to
another week ahead video. Now, in this trading week we have a couple of very important economic events that can create some trading
opportunities for us. On Friday especially we
have the infamous NFP, Non-Farm Payrolls which normally moves the markets in one way or another, but the event that we’re
gonna be focusing on and looking at in more
detail will be the RBA, or Reserve Bank of Australia’s
monetary policy meeting and rate decision coming
up later this week. Now in this video we’re gonna look at our three-step analysis
process for planning and preparing for specific risk events. Now these three steps are firstly, we’re gonna look at the
base on expectations for the Australian dollar, then we’re gonna look at the base on expectations for the event, which is the RBA monetary policy meeting and the rate decision, and then thirdly, we’ll look at possible sentiment shifts or
catalysts that can create some trading opportunities
based on this event. So, let’s jump into the video and we’ll go through these three analysis things. Also, if you’re not yet a subscriber to the channel, and you wanna be notified every time that we release a new video, just click on the subscribe button below as well as the bell notification button, and you’ll be notified every time that we release a new video. Alright guys, so, step one of
our analysis process you know is finding the baseline for
the currency in question. Now that is the Australian dollar. Now we’re gonna follow the same process like we do every week. We’ll go to our Forex
Source trading terminal and within the currency research there we can find the major currency’s
fundamental drivers report. Now this report is just a
detailed analysis and bias for each of the major
currency pays or currencies. This gets updated every single
week, and it just gives us the bias as well as the
fundamental reasoning around that bias for each
of the major currencies. Now, in terms of the
Australian dollar specifically, we have recently changed our bias from a weak bearish to
a more neutral stance. Now, the predominant themes driving the Australian dollar
price action currently is risk sentiment as well as due
to the US/China trade war, as well as RBA’s monetary policy outlook. Now, in terms of the trade war, there has been some recent
more positive comments coming out, some progress
between the two nations, albeit just. There has been some
goodwill from both sides which includes China purchasing more US agricultural products, and from the US side we have a postponement of certain tariffs. Now, October will be
a very important month for trade developments
because the two nations are scheduled to meet again in Washington on the 10th and the 11th of October. Then in terms of monetary
policy at this stage, the consensus view is
that the RBA will need to cut once more this
year which is expected to happen in this week’s meeting, but there are some of the major banks that does not agree
that this might happen. Now the reason why some of the big banks don’t agree with this is
the more positive tone struck by RBA Governor
Lowe in his previous speech that he had when he stated
that the economy has reached a gentle turning point
and the long-term view on the economy remains strong. Okay, so, that gives us the baseline for the Australian
dollar, then we’re gonna look at the baseline for the upcoming RBA monetary policy meeting. Now at this stage it looks like the market is expecting the RBA to
shift to a less aggressive, easing cycle at this stage probably due to RBA Governor Lowe’s previous upbeat speech about the economy. Some of the things that he said about the economy included
that the Australian economy seems to be able to sustain
lower rates of unemployment and underemployment
than previously thought. Lowe did, however, say
that the RBA was prepared to ease further if the need arose to support sustainable
growth in the economy. Now it’s interesting to note
that after these comments made by Governor Lowe, market pricing for a rate cut for this week fell from 80% probability to
just over 60% probability. Most market participants do still expect a 25 basis point cut
from the RBA this week including the four major
banks in Australia. However, it is interesting to note that some big banks
like ING, Morgan Stanley and Nomura expects the RBA to still cut in the November meeting
but to stay on hold at this current week’s meeting. Now, the biggest reaction
from this week’s meeting will most likely not fall
on the rate cut itself but on the accompanying statement. Markets want to see whether the RBA will take a wait and
see mode after this cut or whether they will signal that more cuts are definitely on the table
in the short-term horizon. Now if the market comes out as expected with a 25 basis point
cut and the statement remains largely unchanged, we might see a type of buy the rumor,
sell the fact response, which could see the AUD rally, but the sustainability of such a move will be very dependent
on the overall risk tone in the market at the time as
well as market expectations for the RBA’s monetary
policy going forward. Now we can look at
possible sentiment shifts that can create some trading opportunities from this event this week. Now in terms of a dovish sentiment shift, guys, the most dovish
reaction will be if the RBA cuts rate by more than
the 25 currently pricing by the market, let’s say a
50 basis point cut or more, but in this case the
accompanying statement will be very important
because if they cut, let’s say, by 50 basis points, now again, this is a very unlikely
scenario which will create a very big dovish
shift, but they signal in their statement that they are now done after this cut and would rather go into a wait and see mode, that could actually see an initial spike down in the Australian dollar,
but that can be quickly followed by a reversal
as the market starts to digest the statement,
realizing that okay, this was a big cut but
they might be done for now. So, just keep that in
mind for in case we do see a surprise bigger than expected cut. In terms of what hawkish sentiment shifts we can look out for, the
most hawkish reaction will be if the RBA does not cut this week, but they also announce that they are done with rate cuts for the
time being and will take a more wait and see mode to
asses the economic outlook before altering monetary policy again. Now that could provide
us with an opportunity to buy the Australian dollar at market as a phase one sentiment shift, but again, in both these scenarios what’ll be very important
is what the RBA signals in the accompanying statement. Okay, so, what possible currency pairs we can consider in case we see a dovish or a hawkish sentiment shift. Now, in the case of a dovish shift, guys, from the RBA this week, we can look to pair the Australian dollar against something like
the yen or the Swiss which remains fundamentally bullish due to the safe-haven
appeal with all the trade issues going on as well as the
concerns about global growth. However, if risk
sentiment is very positive at the time of the RBA meeting, pairing the Australian
dollar against something like the Kiwi dollar
might be a better option as the Kiwi dollar should perform well in a positive risk scenario,
but just keep in mind that both the Australian
dollar and the Kiwi dollar should gain strength in
a positive risk tone. So do keep that in mind in case of a dovish shift from the RBA. Now, in case of a hawkish sentiment shift from the RBA this week,
we can look to pair the Australian dollar against
something like the euro or the pound which both
remains fundamentally bearish. However, as we mentioned above, if the risk sentiment is very positive at that time, the yen or the
Swiss will be better options as positive risk tone
usually sees depreciation in safe havens like the
yen as well as the Swiss. Now how can we actually
trade this event now? This event is valid for
trading phase one trades if we do get a clear sentiment shift. Now, if you’re interested to learn more about how this phase one trades work, you can check out our
news trading strategy playlist on our YouTube
channel where we post weekly examples of how these
types of trades play out. If we do get a phase one move generated by a sentiment shift,
then we can also look for a possible phase two pullback of that initial move
and ride the move out. We post updates on these moves inside our tradable sentiment
shifts reports inside the Forex Source Terminal
under the market insights tab. Now you can see each day
which sentiment shifts are in play and which ones are still valid for trading the phase two pullbacks. Not every single pullback
will be a tradable pullback. Even after we see
possible phase one shifts happening in the market,
say, it’s very important that you stay updated with
the relevant information and have that research-driven approach to make sure that you’re always on the right side of the market. Now you can learn about these type of set ups and how they
work during our daily live analysis webinars
that we have each day at 11:30 PST inside the
Forex Source Terminal. Guys, thank you for taking
the time to watch this video. If you wanna learn more about how to trade Forex with economic news events, we actually released a
video about this subject that goes into a lot more
detail on Friday on the channel. So, you can just click on
the description card above. It’ll take you straight to that video. As always, if you like the content and the video, please click that like, and the share button as it really helps you to share more about videos and suggest more of our videos to YouTube viewers. And then until the next video, guys, I hope every one of you will have a profitable trading week ahead. Cheers! (synth swish)

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