May 1, 2012 – Forex Trading Strategy

RBA (Reserve Bank of Australia) is

to keep its borrowing costs at 4.25%, as per general market consensus, after last meeting’s surprise decision of keeping the rates at the same level…

Here´s the forecast for this news release:
12:30am (NY Time) AU RBA Rate Decision Forecast 4.00% Previous 4.25%
ACTION: AUD/USD SELL 3.75% / BUY 4.25% (Unchanged)

Definition:Australian interest rate is often refers to as the “cash rate target”, also called the official cash rate (OCR) or cash rate. This is the Australian base rate. Banks pay this interest rate when they take out a loan with a maturity of 1 day from another bank. By buying or selling bonds and other securities issued by the government the RBA can influence the money supply and thus the cash rate target. A rise or fall in the cash rate often also leads to a change in the interest rates for mortgages, loans and savings.

The Trade Plan
If RBA decides to keep rates unchanged, we will BUY AUDUSD… If RBA cuts rates by 0.5% to 3.75%, we should also see a strong reaction in the market to SELL the AUD as the market will be surprised.

Primary currency pair: AUD/USD
Forecast: 4.00
Previous: 4.25
LT1 (Lower Trigger 1): -0.25 [SELL]
UT1 (Upper Trigger 1): +0.25 [BUY]

There are 29 estimates. As of I'm typing it, 27 out of 29 economists expect them to cut the rates from 4.25% to 4.00% level. Additionally, there are two economists that expect even bigger cut right to 3.75%. Nobody expects them to keep the rates unchanged at 4.25% level.

So if Australia cuts the rates to 3.75% level (or lower) ( -0.25 trigger), AUD/USD should go down by at least 50 pips. If Australia doesn't cut the rates at all (+0.25 trigger), AUD/USD should go up by at least 50 pips. If they cut the rates to 4.00% level (0.00 deviation) as expected, it will be a no trade.

As always with the interest rates, be careful and do not overtrade it.

BOOKS FOREX

Special Report: Five Most Dangerous Problems in Forex Trading - Dariusz Swierk - EUR 7,20
B0054RHOH6