Author: Greg Michalowski

Market is split on go or no go

The Reseve Bank of Australia interest rate decision will be announced on Tuesday and the market is split on the expected outcome.  Will they announce the second consecutive cut or will they refrain?

Eamonn posted BofA/Merrills expectation here. Adam give his views HERE.

When the decision is a bet red or black scenario, there can be a meaningful reaction from the market.  However, it also increases the risk - before the details of the event are known.  Remember, we are traders not gamblers.  

When the odds are a toss up, it is best to do your homework, set the targets above and below and look to trade if a bullish or bearish scenario is triggered.

What would be a bearish scenario?  For me, a bullish scenario - with the best potential for a trend like move - would have the following conditions: 

  1. Cut rates
  2. Express increasing concerns about China/global growth
  3. Express concerns about the Australian business investment intentions 
  4. Express increasing concerns about employment
  5. Express increasing concerns about terms of trade, and 
  6. Concerns about the value of the currency being too high
What would be a bullish scenario? Since the expectations are not for higher rates, the bullish scenario would be for:
  1. No cut in rates
  2. A wait and see attitude after the surprise cut last month
  3. An attitude that there is enough stimulus already and that a period of rate stability is appropriate
Of the two scenarios, the bearish scenario is the more likely. I do no think there are many who would expect no change AND a feeling that a period of rate stability is appropriate for an extended time period. 

There is a third scenario and that would be a combination. That scenario would likely have no rate cut, but also show concerns about the economy/global economy. In this situation, I would expect more choppy up and down activity. This is not the most ideal environment to expect a trend like move.  So trade with more caution..

Given the scenarios, what are the upside and downside targets?.

Bearish scenario: On a bearish scenario (all or most of the above conditions checked off), I would be looking for a trend like move. The average trading range for the AUDUSD over the last 22 days is about 90 pips. I would be looking for a range equal to or greater than 90 pips. If I can sell at 40 pips or 50 pips I would be happy.  However,  I also have to protect against a market that does not do what I expect because 
  1. the market is too short, 
  2. my reading of the decision was wrong, 
  3. other fundamental or technical reasons that I don't anticipate
In other words, I need to define and limit my risk.

So what are the downside targets given a bearish scenario?

 The levels that stick out to me as being the most obvious targets include:
  1. 0.7745; 61.8% of the move up from the Feb 12 low (22 pips from the currently level)
  2. 0.7719-33:  There are a series of swing lows and highs in this area (see red numbered circles. 50 pips from the current level)
  3. 0.7693/97: Swing and swing high  (blue circles - 74 pips from the current level)
  4. 0.7665:  Corrective lows on the way up on Feb 12 (101 pips)
  5. 0.7643.  Low price  from Feb 12th (125-130 pips from the current trading area)
  6. 0.7625 : Low for the year. Low after the last surprise cut in rates last month (approx 140 pips from the current area).
As mentioned, if the bearish conditions are met, I would expect a trend move. That implies a range for the day that is greater than the 90 pip average.

If the market gaps lower on the news, and that news satisfies the bearish scenario, selling a correction against the 0.7719-33 level seems the most ideal opportunity.  If so, the price should not trade above the 0.7745 level (the 61.8%). That would be the line in the sand/ risk on a short after the decision.  

The expectation would be for a move to at least 0.7665 (given the current price level).  In other words, the price should travel at least 101 pips (90 pip average). 

If the market really trends, a move to 0.7643 or 0.7625 would be targets - although it would might be a stretch for the day at least. It could be an easy target for the week, however (traders will start to target 0.7500 on the downside).

What about a bullish scenario?  I do not expect the upside to be more difficult  - mainly because it is hard to see the RBA saying they are happy with the economic backdrop.  However, if the conditions for a bullish scenario are met, the target levels to look for include:

  1. 0.7794:  The underside of the broken trend line (25 pips)
  2. 0.7809:  38.2% and likely near the 200 hour MA (50 pips)
  3. 0.7822:  Near 100 hour MA (63 pip move)
  4. 0.7848: Swing highs (84 pip move)
  5. 0.7880: 38.2% of move down from 2015 high (jan 15 high - 115 pips)
  6. 0.79119: Corrective high from last week (146 pips)
Like a bearish move, if ALL the bullish scenario conditions are met, looking to buy against the 100 and 200 hour MA would be the line in the sand for such a move.  A trend move could head to 0.7880 and perhaps all the way to the high (at 0.79119) on a strong trend.   

The 3rd scenario is no cut but dovish overtures.  On such a scenario, there could be reactionary move higher to the 200 or 100 hour MA (green and blue lines in the charts above).  Under that scenario,  I would expect cautious sellers against the moving averages, with stops on a move above.  

Trading is not gambling.  Since the RBA decision is a 50-50 proposition, it makes more sense to do homework and define bullish and bearish scenarios, Then trade after the details of the event are known. 

If the bearish or bullish conditions are met, understanding the target levels in the direction of the potential trend will provide the road map for your trading.    

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