RBA: Will the stability of rates continue to be prudent?

If rates remain on hold tomorrow it will be the 12th consecutive time at historic lows.

1st July: Rates remained on hold at 2.5%

Following the last rate statement the A$ rallied to an 8-month high as the RBA was not as Dovish as expected, and no attempt to jaw-bone the Aussie. However after reaching our 0.950 target it didn't hang around long before promptly reversing and posting the worst 2-day losses since January. The wheels began to fall off when the Trade Balance fell to an 18-month low to see A$ shed over 60 pips and give back most of the previous day's gains. However the sucker-punch come from Glen Stevens himself as he decided to jawbone the dollar during a speech, seeing it decline a further 100 pips for the day. The

The speed of the decline form 0.950 did (and still does) make me suspect we will not be returning to 0.950 any time soon and further suggest we are seeing a topping pattern unfold on the weekly charts.

What are the odds of a rate change tomorrow?

Following the jawbone from Stevens and rising unemployment in June, the markets then priced in a 7% chance of a rate cut (according to the ASX 30-day Interbank Cash Rate target). However when inflation figures came in very positive and at the top of the RBA's 2-3% target (annualised) then this pretty much annulled the markets expectation of a rate cut any time soon, with the markets now only seeing a 2% chance of a rate cut tomorrow.

Whilst there are inflationary pressures present the overall picture remains mixed.

For the Hawks:

- Annualised inflation at 3% (upper band of RBA target)

- Retail sales have expanded 11 out of the last 12 months

- Booming housing market

- Non-mining investment is rising

For the Doves

- Mixed signals from forward looking employment

- Wage pressures required to help inflation which are not yet present

- RBA are not entirely sure of the effectiveness of current rate cuts on the shortfall of mining investment

- A 'historically high' A$ isn't assisting the economy, especially in light of falling commodity prices

- Interest rate differentials and falling commodity prices continue to suggest the A$ is still overpriced.

What to listen out for in the Rate Statement:

The A$ is currently looking fragile as it hovers above 93c leading up to tomorrow’s rate decision. Whilst pretty much a given there will be no changes in either direction (for some time) I suspect that even the slightest attempt to Jawbone the A$ could see it break below 93c to target 0.925 and maybe even 0.920.

If there are further signs of uncertainty from RBA regarding how 'effective' current interest rates are in helping non-mining investment his may provide extra confidence of a rate cut in future for the Doves, which will have a negative impact on the A$.