A slew of better than expected domestic economic data releases and a mostly unchanged situation in Europe have resulted in an almost unanimous view that the RBA will not loosen monetary policy at today’s meeting. But this doesn’t mean we are expecting the meeting to be a non-event. There is still the possibility of some market moving commentary in the statement that accompanies the rate decision, even if the official cash rate is left unchanged at 3.5%.
As we stated earlier, almost all economists are predicting the RBA to leave the OCR unchanged. A theory which is backed up by investors, with current market pricing in interbank futures suggesting there is more than an 80% chance the RBA board will not move, when only two weeks ago it was more like 50%. The reasoning behind the abrupt change of heart was a slew of better than expected economic data releases which may make it hard for the RBA to justify a rate cut. In fact, the only big data release that may provide scope for the RBA to cut rates was Q2’s inflation print. But even this didn’t print significantly away from market expectations. Whereas retail sales, trade balance and housing approvals and prices data have beaten expectations over the last two weeks.
Overall, it appears the domestic economy is starting to feel the effects of recent rates cuts. But the RBA will likely want to wait and see the full impact of previous rate cuts before cutting the OCR again, unless, of course, global sentiment takes a significant turn for the worse, which is hasn’t thus far. Whilst there are definite changes that need to be addressed offshore, especially in Europe, it’s nothing that is going to greatly alarm the RBA, at least not yet.
Furthermore, fears surrounding a hard landing in China, a theory we have never supported, appear to be dissipating as Beijing uses its arsenal of tools to stimulate growth without massively stocking its property bubble. Hence, when we combine the relatively unchanged situation offshore with a slow uptick in domestic data it is hard to see why the RBA would cut rates today.
Despite the fact the it is widely excepted the RBA will move on policy, it is possible it will upgrade its economic forecasts for the domestic economy to better reflect the recent slew of improved economic data. If this is the case then there is the possibility the aussie will jump higher. AUDUSD may even find the legs to break through 1.0600. But this is not a certainty. Excluding the RBA, AUD appears to be fundamentally overvalued. When combined with the fact that so much of the market’s focus is elsewhere, a push higher for AUDUSD may be limited – i.e. may remain below 1.0600. However, if the pair does confirm a break of that level then the path may be clear for a move to around 1.0640.
AUDUSD – Daily
EURAUD may also be an interesting, and we think better, pair to watch post decision. We still think there is some fundamental weakness in the EUR. Whereas, if it appears the RBA has finished its easing cycle, even if it’s just for the near-term, then there is some upside potential for AUD. Hence, with the recent retracement creating the possibly for more downside, we think a surprise on the upside from the RBA statement may open the door for a push towards 1.1600.
EURAUD – Hourly