The RBA is expected to keep the cash rate steady

The Reserve Bank of Australia (RBA) is expected to leave the official cash rate at 2.5% at its policy meeting tomorrow. Last month the bank changed its policy stance by removing its dovish bias, and it’s unlikely it will completely change its tune this time around. The Australia dollar remains at a more comfortable level for the RBA, which is keeping upward pressure on inflation. This should keep the bank on the sidelines for some time to come.

However, since the bank last met there has been some worrying Australian economic data, particularly from within the labour market. Australia’s unemployment rate jumped to 6.0% in January, from 5.8% in December. Even more concerning is that all of the job losses come from full-time employment and the participation rate was revised lower in December. While a rise in part-time employment of 3.4K over the month helped to mask the 7.1 thousand full-time jobs lost, it likely means that workers are only taking part-time jobs because they cannot get full-time ones. This is a sign of a sick labour market, and overall January’s labour market report was a timely reminder of the problems still plaguing Australian job seekers.

Also, Australia’s Q4 CAPEX report (released last week) was disappointing. Private capital expenditure in Australia fell 5.2% in the final quarter of 2013, after rising an adjusted 2.6% during the prior quarter. Burrowing deeper into the report, the news isn’t as bad as the headline number suggests. Yet, it underscores the need for accommodative monetary policy in Australia for some time to come. Judging by last week’s figures, predicted growth in non-mining parts of the economy isn’t going to come close to picking up the slack left behind by falling mining investment. There was only a very minor advance in spending plans for 2014-2015 for non-mining investment and a 25% drop in investment intentions in the mining sector over the same period. This suggests that we may be disappointed by this week’s Q4 GDP figures (current expectations are around 0.7% q/q).

In regards to tomorrow’s meeting, the weakness in the labour market and Australia’s CAPEX report isn’t likely going to be enough to push the RBA to cut interest rates again. There have been some positive signs from the economy, including strong trade figures and encouraging business confidence data. Furthermore, there is some evidence that the low Australian dollar is continuing to put upwards pressure on prices in trade exposed sectors, which should continue to provide upward momentum for inflation. Overall, the broadly mixed economic data may cause the RBA to reiterate that the most prudent course of action is for a period of stability in interest rates.

However, there is some risk that the RBA will be slightly more dovish than last month, due to the aforementioned soft economic data. This could weigh on AUD as it struggles with concerns about China and events in Ukraine. AUDUSD is currently finding some sticky ground around 0.8902 as it awaits the release of HSBC’s manufacturing gauge for the Chinese economy. Overall the pair is looking somewhat weak and could head towards a support zone around 0.8820 if today’s data disappoints and if the RBA errs on the side of caution.

Source: FOREX.com