In about 6 hours from now, the Reserve Bank of Australia (RBA) will release its interest rate decision, and this could impact the AUDUSD. The AUDUSD has been under significant pressure since the start of the year as the novel coronavirus outbreak in China has severely dampened economic activity in the region. Increase in the global spread has caused stock indices all over the world to tank severely.
This depressive economic impact was brought to the fore by the China Manufacturing PMI data. The all-time low of 35.7 recorded in this data piece indicates a near-total collapse of factory activity in China. As an economy which heavily depends on exports to China, little factory activity means low demand for exports; a knockout combo for the Australian economy.
Markets had factored in a 25bps rate cut in April 2020 by the RBA. Still, the severe decline in the PMI numbers in China may force the RBA into an earlier rate cut, as its local economy struggles to deal with imported cases of the coronavirus.
Therefore, the consensus is for the RBA to deliver a 25bps rate cut by 3.30 am GMT.
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Trading the RBA Interest Rate Decision
The factor which could decide the reaction of the AUDUSD would be the following:
- If the RBA decides to leave rates unchanged, which is a situation with very little probability. Disappointed traders may punish a lack of action by selling the AUDUSD aggressively.
- If the RBA decides to cut by 25 bps, traders may be pleased, and the AUDUSD may continue its rebound after a choppy session.
- If the RBA decides to cut by 50bps, the AUDUSD could be sold off quite hard.
The AUDUSD is already at lows not seen in 11 years and the coronavirus epidemic is nowhere near containment. Therefore, the economic conditions in China and around the world are not going to get any better. If the RBA has to act to make the Aussie Dollar cheaper for continued investment in Australia, it has to act now.
The immediate downside target is found at 0.63133. An AUD-negative interest rate decision could move the pair towards this target, which is in line with medium-term price targets set by several analysts (including Westpac).
Any price recovery could target the 66742 the medium-term resistance, but 0.66000 could be a pitstop.
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