RBA preview: risk vs. reward


Best analysis

It has been a particularly volatile week for the Australian dollar as it’s broadly deteriorates alongside key Australian commodity prices. Thin market conditions and uncertainty about what the Reserve Bank of Australia will do at its policy meeting next Tuesday are playing havoc with aussie. In fact, AUDUSD has been jumping all over the place this week and price action is looking somewhat confused.

According to the OIS market there is an almost 80% chance that the RBA will lob 25 basis points of the OCR next Tuesday, which is incredibly high and the most dovish the market has been on an RBA policy meeting in a long time. However, economists aren’t as convinced that the RBA will loosen monetary policy this month. According to a fresh Bloomberg survey, only 10 of the 26 economists surveyed expect the RBA to cut the official cash rate to a record low 2.00% at next week’s meeting. This gap between the expectations of the market and economists isn’t anything new, but it highlights how strong the arguments are for both a rate cut and remaining on hold.

Why Stevens should ease policy further

The RBA should lower the official cash rate further because the economy is clearly struggling and further policy loosening would likely result in a weaker Australian dollar which ,all else being equal, would further alleviate pressure on trade exposed sectors of the country. Hope that non-resource parts of the economy will pick up the slack being left behind by diminishing mining investment is quickly fading. Investment coming from outside of the mining sector isn’t nearly enough and it’s clear that businesses aren’t very optimistic, thus we can’t see a meaningful pick up in investment in the near-term.

Australian economic data highlights how precarious the situation is downunder. Since the bank last met most economic data have underwhelmed market expectations, including the all-important Q4 GDP numbers (the Australian economy grew at just 0.5% in Q4, missing a consensus estimate of 0.6% q/q) and February’s misleading jobs report (the headline figures were good but these were overshadowed by a big drop in the labour force participation rate). Given these negative developments and the fact that the RBA’s language already suggests that it’s looking at cutting the cash rate this month, it seems likely that the bank will cut sooner rather than later.

A part of one sector of the Australian economy has the potential to keep the RBA on hold

There’s only one main reason why the RBA shouldn’t loosen monetary policy further, that is the performance of the residential and, to a lesser extent, commercial property prices in certain parts of the country. Of particular concern are the housing markets in Sydney and Melbourne where prices continue to skyrocket. If the RBA were to loosen monetary policy further it has the potential to add fuel to an already dangerously hot property market.

Clearly there’s a significant amount of risk when it comes to lowering interest rates further, but the risk is localised and contained in Australia’s two largest cities. Even so, is the reward worth the risk? There’s no doubt that the broader economy needs support from both the fiscal and monetary sides of the policy equation. Yet, the RBA has admitted that the flow-on effects of looser monetary policy are significantly diminished at this end of the interest rate spectrum. In saying that, the bank cannot stand idly by while Australia’s economic outlook deteriorates further. What's more, the RBA still has the option of using macro-prudential tools in an attempt to cool property prices.

The aussie

A large proportion of the market is banking on the RBA cutting the OCR next week, which means the biggest risk for the AUD appears to be to the upside if the bank elects not to cut. In fact, it may change the currency’s short-term trajectory, assuming commodity prices flatten out. On the downside, we are keeping an eye on the pair’s almost six-year low around 0.7560. If the bank elects to cut the cash rate and maintains its dovish tone then this support zone may crumble and attention will shift to another support zone around 0.7450.

Recommended Content


Recommended Content

Editors’ Picks

USD/JPY pops and drops on BoJ's expected hold

USD/JPY pops and drops on BoJ's expected hold

USD/JPY reverses a knee-jerk spike to 142.80 and returns to the red below 142.50 after the Bank of Japan announced on Friday that it maintained the short-term rate target in the range of 0.15%-0.25%, as widely expected. Governor Ueda's press conference is next in focus.  

USD/JPY News
AUD/USD bears attack 0.6800 amid PBOC's status-quo, cautious mood

AUD/USD bears attack 0.6800 amid PBOC's status-quo, cautious mood

AUD/USD attacks 0.6800 in Friday's Asian trading, extending its gradual retreat after the PBOC unexpectedly left mortgage lending rates unchanged in September. A cautious market mood also adds to the weight on the Aussie. Fedspeak eyed. 

AUD/USD News
Gold consolidates near record high, bullish potential seems intact

Gold consolidates near record high, bullish potential seems intact

Gold price regained positive traction on Thursday and rallied back closer to the all-time peak touched the previous day in reaction to the Federal Reserve's decision to start the policy easing cycle with an oversized rate cut.

Gold News
Ethereum rallies over 6% following decision to split Pectra upgrade into two phases

Ethereum rallies over 6% following decision to split Pectra upgrade into two phases

In its Consensus Layer Call on Thursday, Ethereum developers decided to split the upcoming Pectra upgrade into two batches. The decision follows concerns about potential risks in shipping the previously approved series of Ethereum improvement proposals.

Read more
Bank of Japan set to keep rates on hold after July’s hike shocked markets

Bank of Japan set to keep rates on hold after July’s hike shocked markets

The Bank of Japan is expected to keep its short-term interest rate target between 0.15% and 0.25% on Friday, following the conclusion of its two-day monetary policy review. The decision is set to be announced during the early Asian session. 

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures