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Australia Cash Rate preview

Whilst the market consensus is for rates to remain on hold tomorrow it will be the wording of the statement, and any commentary regarding the FED, China or easing bias, which is likely to cause a market reaction.





As long as a rate rise remains on the table, then RBA are likely to be happy with 2% cash rate. Only last week I outlined that the FED may still delay their interest rate hike which, in turn, could see RBA eventually cut their interest rate to 1.75%. As the Chinese stock markets plunged further and further the expectation of an RBA rate cut rose to 15% yet less than one week later are now pricing in a mere 6% cut tomorrow. I suspect this number to be correct as I never through they would cut this soon but I will pencil in a cut around November or December. 





The RBA Shadow Board think RBA should keep rates on hold at 2% but it should be remembered that they have absolutely no power whatsoever as to what the RBA decides to do. They merely provide their opinion. 

However at the back of last week, during the Jackson Hole symposium some FED members signalled to the markets that a September rate rise was very much on the cards. Personally I find this a little surprising given the volatility that has been present in recent weeks, as this alone should be a warning to the FED that investors are clearly twitchy about China. Still, the developments on China do not directly impact US growth and employment yet, but markets are forward looking as we clearly saw when global stocks fell with Chinese growth data.

What should make RBA's statement of particular interest tomorrow is if they have put back the easing bias they only just removed and, of course, any commentary to do with China and FED rates. RBA have been convinced that FED are on track to raise rates and tomorrow we will find out if they are as confident as they have been all year. Any uncertainty of FED action (or lack of) could be deemed as dovish by markets and send the Aussie lower to test 70c. 

Friday's Nonfarm payroll data could make or break the September rise
A strong data set will provide extra confidence for both the FED and RBA that the US will raise interest rates this year (although not necessarily September). However a surprisingly poor employment data set could be enough to annul the hawkish members at the next meeting. 



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