Reserve Bank of Australia Preview: Sluggish economic progress should mean a cautious RBA

The Reserve Bank of Australia will announce its decision on monetary policy on Tuesday, October 5. Market players are anticipating an on-hold stance, with no changes to the cash rate and the financial facilities programs. Similar to what the European Central Bank did, Australian policymakers have reduced their weekly bond-buying to A$4 billion but deferred it in time. The focus will be on how policymakers evaluate economic performance.

Real wages at record lows

Half of Australia remains under lockdowns, with some regions reaching global records of days under restrictive measures. The number of new coronavirus contagions in the country seems to have stabilized, although the government plans to lift restrictions when 80% of the population above 16-year-old is fully vaccinated. Such a target is expected to be reached in mid-November, which means that the economy will remain restrained through half of the final quarter of the year.

Meanwhile, the annual inflation rate in Australia jumped to 3.8% in Q2 2021 from 1.1% in Q1, the highest reading in over a decade. On the employment front, the country’s unemployment rate contracted to 4.5% in August, the lowest reading since November 2008. However, the participation rate has declined to 65.2%. Additionally, real wages were down 2.1% in the second quarter of the year. The central bank has said that higher rates will have to wait until wage growth surges to 3%, something that they don’t foresee until 2024.

The market has been speculating about a rate hike by the end of 2022, but RBA Governor Philip Lowe has said that such speculation is way out of RBA’s consensus. Policymakers will likely stick to their optimistic but cautious view of the economy.

AUD/USD possible scenarios

The AUD/USD pair is recovering ground ahead of the event, as demand for the greenback receded. The pair is trading at around the 38.2% retracement of its latest daily slump, losing bullish strength. In the daily chart, the pair is also battling with a firmly bearish 20 SMA, which keeps heading south below bearish longer ones. Technical indicators continue to recover but within negative levels.

The near term picture shows that technical indicators have turned flat near overbought readings, as the price hovers around a flat 200 SMA. The bullish case will become firmer if the pair clears the current area, with the next resistance level at 0.7330. Once beyond the latter, the recovery could continue toward 0.7370, although the closer the pair gets to the 0.7400 area, the higher will be selling interest. Bears will have more chances if the pair falls below 0.7240, the immediate support level.