Reserve Bank of Australia Preview: Policymakers to remain cautiously optimistic

• The RBA is expected to maintain its current monetary policy on hold.
• Mounting tensions between China and Australia could be a risk factor in the near future.
• AUD/USD is bullish and poised to test the year high at 0.7063.  

The Reserve Bank of Australia will announce its latest decision on monetary policy this Tuesday. The central bank is widely anticipated to keep its current monetary policy unchanged, as policymakers have been cautiously optimistic over the economy’s performance within the pandemic context. Many were said about the economic downturn being less profound than initially anticipated, as the coronavirus seems under control in the country, leading to sooner-than-expected reopenings.

The Australian cash rate stands at a record low of 0.25% and is expected to remain at the mentioned low for a long time. Adding to record low rates, the central bank has opened the door to bond-buying, although it only purchased government debt on one occasion, and it doesn’t seem it would need to rush into it anytime soon.

Coronavirus and China

Indeed, there has been a spike in COVID-19 cases in the last days, leading to selective lockdowns in some Melbourne’s suburbs, but at the time being, market players are not expecting a response from policymakers. If the situation worsens in the upcoming weeks, then, August meeting could bring some action.

Meanwhile, the Australian commercial relationship with China is deteriorating. Tensions began when Australia supported an investigation over the origins of COVID-19 and the country’s responsibility for the pandemic spread. China answered by imposing tariffs on Australian barley while banning beef from some Australian firms.  Over the weekend,  news indicated that Australia is edging towards a “partial economic decoupling” with China as a result of the coronavirus pandemic, a new Australian parliamentary inquiry has heard. It is yet another risk factor that can require of the RBA, but not in the near-term.

AUD/USD possible scenarios

The AUD/USD pair is nearing the 0.7000 level ahead of the event, trading at its highest in almost a month. The ongoing optimism triggered by Chinese authorities cheering an economic comeback keeps the Aussie afloat, alongside with soaring equities. Whereas this upbeat mood continues, it will likely depend on coronavirus-related headlines, instead of whatever the RBA says, as little is expected today.

The pair could anyway find support in optimistic policymakers, in which case the pair could retest the year high at 0.7063. Beyond this last, the next possible bullish target is the 0.7100 figure.

A surprise dovish stance could see the pair retreating towards the 0.6940 price zone, while below this last, the next relevant support comes at 0.6895.