RBA Preview: eyes on Stevens' statement

The Reserve Bank of Australia (RBA) has a policy meeting in Sydney today where it’s widely expected to leave the official cash rate at a record low 2.5%. Since the bank last met economic data has been broadly mixed which fits with the RBA’s neutral policy stance. This means the market’s attention will once again be focused on a statement by Governor Stevens which will accompany the bank’s announcement.

Nonetheless, this statement is also not expected to yield any major surprises. The RBA has expressed its willingness to sit on the sidelines for the time being, and in the absence of any major shocks to the system it’s in the bank’s best interests to maintain the status quo. At its last meeting the bank reiterated that the most prudent course is likely to be a period of stability in interest rates.

According to the interbank market there is the slightest chance that the RBA will lower interest rates today, with emphasis on slight. While the stubbornly high Australian dollar is keeping a lid on inflation, consumer price growth is at the top of the RBA’s target range. Normally this may be enough to see the RBA raise interest rates, but given the current fragile economic environment this is highly unlikely. Therefore, the most prudent course of action is to maintain the current accommodative stance of monetary policy.

Later this year there is still the possibility that the RBA will lower the official cash rate even further, but this depends on how the economy fairs in coming quarters. Last quarter, GDP growth was above expectations, helped by strong growth in resource exports, which isn’t expected to be sustained in coming quarters, thus the economy remains vulnerable to diminishing mining investment. There have been some signs of life in non-resource parts of the economy but nothing substantial.

Overall, the RBA, like the rest of the market for that matter, remains on data watch. It would likely take a significant and sustained worsening of Australia’s economic outlook to see the RBA reengage a more dovish policy stance, thus we tend to think that the bank will leave the cash rate at 2.5% for at least the remainder of this year. In fact, given current economic indicators the RBA’s next move may be to raise interest rates in the latter half of 2015.

The Aussie

However, we do expect the RBA to become more vocal about the negative economic impacts of the high exchange rate if it doesn’t weaken in coming months. At present, the historically high Australian dollar is helping to keep a lid on inflation but it’s also limiting economic growth in key trade exposed sectors of the economy.

AUDUSD remains in a fairly tight trading range, but it’s nearing some key technical levels. On the upside, we are watching an important resistance zone around 0.9445/60, a break of which could revitalise AUD bulls. However, if price action were to fall below a medium-term upward trend line (see chart) the pair may begin to drift lower.

Source: FOREX.com