RBA Preview: No cut, but AUD/USD has reasons to hit new lows – three scenarios

The relative calm may make way to a plunge to new ten-year lows – even if the Reserve Bank of Australia maintains the Cash Rate unchanged at 1.00%. The RBA is widely expected to leave the interest rate unchanged for a second consecutive month after cutting rates in June and July. The Canberra-based institution may prefer to wait for the Federal Reserve to act in two weeks before making any changes. 

However, it has several reasons to release a statement full of worries – perhaps signaling further rate reductions in the near future.

Domestic weakness

Australia reported that company inventories dropped by -0.9% in the second quarter against 0.3% that was expected. Perhaps even more worryingly – this is not a one-off – inventories are down 0.3% YoY, showing a trend. 

The data feeds into Australian Gross Domestic Product, due out later this week. In that context, prime minister Scot Morrison said on Monday that he expects soft GDP read. If he had early access to the data on Monday – the RBA surely has the report before its eyes on Tuesday. 

Phillip Lowe, Governor of the RBA, previously noted that the bank is carefully watching the unemployment rate – which has remained at 5.2% in July. While the latest official data is encouraging, the latest unofficial figure from ANZ already paints a darker picture. The commercial bank reported that advertisements for jobs fell by 2.8% MoM in August 11.4% YoY – a worrying leading indicator.

The Melbourne Institute's latest inflation measure for September has come out at 0% MoM and 1.7% YoY, down from 1.8% previously. Trimmed mean inflation – known as core inflation in other places – is at 1.7%. While this is not the official Consumer Price Index (CPI) that the bank targets, it shows that inflation remains below the 2-3% target.

Trade calm may end

The current calm in markets is a result of President Donald Trump's optimistic messages about reaching a deal with China. The president touted every low-level meeting as significant and emphasizing that high-level talks scheduled for this month will still go through.

However, the US has gone ahead with slapping new tariffs on China on September 1 – and China retaliated with its own counter-measures. 

Moreover, Chinese media has called on the US to "stop acting like school bully" – in a direct insult to Trump. Officials in Canberra are watching these developments and are unlikely to reach the conclusion that the trade spat is set to end anytime soon. China is Australia's No. 1 partner and the land down under depends on exports to the world's second-largest economy – which is already slowing down. Further trade tensions may further weigh on both economies. 

Three AUD/USD scenarios

1) Dovish tone: All in all, the RBA has several reasons to open the door to more stimulus and weigh on the Aussie. The statement may hint that more stimulus due to concerns about employment, subdued inflation, the trade war – and perhaps even the strength of the A$ – despite recent weakness. 

AUD/USD is already on the brink – trading dangerously close to the 2019 low of 0.6671 – the lowest since 2009. A small push by the bank and we may see new lows.

This scenario has a high probability. 

2) Relaxed message: In case the RBA conveys a more relaxed message – such as waiting for more data – AUD/USD may remain unchanged and then move on further developments in the trade war.

This scenario has a medium probability.

3) Shock cut: Australia's central bank has surprised investors in the past with surprise moves – both to the upside and the downside. A rate hike can be ruled out at this juncture – but a surprise rate cut is a possibility.

The Reserve Bank of New Zealand shocked markets with a deep cut of 50 basis points in July – acting preemptively. While Governor Lowe said that Wellington's decision has no impact on him – he may now act to preempt the Fed's potential rate cut later this month.

In this scenario, AUD/USD would plunge – perhaps below 0.66, yet the chances are slim.

Conclusion

The RBA is set to leave rates unchanged on September 3, at 4:30 GMT. A dovish message is the most likely scenario and would weigh on the Aussie – perhaps sending to new decade lows. A balanced message has medium probability and would help it stabilize, while a shock rate could would send it plunging – but is highly unlikely.