Fundamental Update: The RBA is expected to hold interest rates steady at 3.00%

On the back of extreme monetary policy loosening during 2012 and an improving global economic outlook we expect the Reserve Bank of Australia (RBA) to keep the official cash rate at 3.00% at its policy meeting later today. Since the RBA last meet in December we have witnessed a pick-up in investor sentiment in Europe, the US and China. Coupled with the fact that the bank will likely want to fully assess the impact of previous easing measures, we think the RBA board will decide on a wait-and-see approach today. However, a slew of disappointing domestic data releases keeps the door open for further possible rate cuts later this year.

Last year the RBA was driven to slash the official cash rate (OCR) by 125 points, after two consecutive 25 bps cuts in 2011. Underpinning the cuts was a deterioration in economic conditions at home, predicated by a weak levels of global economic demand. Abysmal economic conditions in Europe, the threat of a double-dip recession in the US and a cooling Chinese economy all played their parts in pushing the RBA to loosen policy so severely.

This year a lot off that uncertainty has been removed, including the threat of a hard landing in China which threatened to cripple the support strut of the Australian economy, the mining sector. While some threats to this sector remain, a rebound in growth in China contributed to a rebound in iron ore prices, Australia largest export, and calmed the market’s nervous.

However, recent weakness in domestic economic data creates the possibility for future rate cuts, thereby turning the market’s attention to the RBA’s statement that accompanies its rate decision. Since the RBA board last meet in December GDP data cooled during Q3 to +0.5% from +0.6%, labour market conditions haven’t improved, the trade deficit widened, and despite a small pick-up in consumer confidence over the last two months retail sales fell over the same period. We did, however, see a rise in business confidence, but it still remains well below its long-term average and the less volatile business conditions index rose more modestly. When the uncertain domestic situation is combined with ever-present doubt about the future economic health of Europe and stagnant levels of growth of the US, we think it would be unwise to completely rule out future rate cuts from the RBA.

Nonetheless, we aren’t expecting the board to give much away in today’s statement. We don’t expect the bank to close the door on further policy decisions, as it waits to fully assess the impact of previous interest rate cuts. Accordingly, we don’t expect the statement to have a massive impact on the aussie, but if the bank keeps the door open for further cuts down the road then we may see a cap put on any attempt to drive the commodity currency higher in the near-term. AUDUSD is currently finding some support around its 100day SMA. Beyond this we are watching 1.0360 and then the pair’s 200day SMA, currently around 1.0310.

Source: FOREX.com