On Tuesday, at 4:30 am GMT, the Reserve Bank of Australia will be releasing the results of its latest interest rate decision. Because it is one of the primary tools that the RBA uses to communicate with the public about monetary policy, it tends to create a ton of volatility in the markets. This makes it a great trade-the-news candidate, as we are looking for quick and swift modes to help us grab some pips.
Just like the last statement, no changes are expected to be the central bank's base line rates of 4.25%. Rates have been on hold since December 2011, when the RBA last cut interest rates by 25 basis points.
Still, I believe there's a chance we could be in for some surprises tomorrow, either via a rate cut or possibly more dovish comments in the accompanying statement.
Why do I think this might happen?
If you've been paying attention to the latest news from China, you'd know that there are some concerns about the future growth on the world's second largest economy.
A couple weeks back, an executive from BHP Billiton, the world's largest mining company, said that they expect Chinese demand for iron ore to drop to single digit growth over the next few years. Take note, iron ore is one of Australia's main exports, with China being its largest trading partner. This could cut into the profits of Australia's mining industry.
In other news, recent data has shown that industrial profits from China has dropped by 5.2%, while Chinese manufacturing PMIs have continued to trend lower. Even the People's Bank of China has considered lowering its reserve requirement ratios for banks to stimulate more lending and spending.
Weakness in China is just bad news for Australia. I think RBA officials may recognize this and cause them to think twice about keeping rates on hold once again.
Now let's see take a look at the price action of the Aussie in two most recent statements to give us some insight as to how the upcoming announcement could affect the Aussie.February 7, 2012
In the last two statements, the Aussie moved strongly in one direction following the RBA's announcement. This means that in trading this news release, you must be wary of breakouts.
One strategy you can do is the "straddle." It is a trading method that involves placing orders just below or above the current price. If price goes in one direction, one of your two orders will get triggered. Once you think the move is done, you can then close your trade for some quick pips.
Having a directional bias is a good option too. If you think the RBA will be concerned about Chinese growth, then you can look to set short orders below potential support levels and aim for around 30 to 50 pips.
Of course, these trading strategies aren't written in stone. This is the forex market and anything can happen. Be wary for any surprises! Good luck!