Forex.com - Analytics

    Forex.com

    406.50 5.00/10
    100% of positive reviews
    Real

    RBA preview: risk vs. reward

    It has been a particularly volatile week for the Australian dollar as it’s broadly deteriorates alongside key Australian commodity prices. Thin market conditions and uncertainty about what the Reserve Bank of Australia will do at its policy meeting next Tuesday are playing havoc with aussie. In fact, AUDUSD has been jumping all over the place this week and price action is looking somewhat confused.

    According to the OIS market there is an almost 80% chance that the RBA will lob 25 basis points of the OCR next Tuesday, which is incredibly high and the most dovish the market has been on an RBA policy meeting in a long time. However, economists aren’t as convinced that the RBA will loosen monetary policy this month. According to a fresh Bloomberg survey, only 10 of the 26 economists surveyed expect the RBA to cut the official cash rate to a record low 2.00% at next week’s meeting. This gap between the expectations of the market and economists isn’t anything new, but it highlights how strong the arguments are for both a rate cut and remaining on hold.

    Why Stevens should ease policy further

    The RBA should lower the official cash rate further because the economy is clearly struggling and further policy loosening would likely result in a weaker Australian dollar which ,all else being equal, would further alleviate pressure on trade exposed sectors of the country. Hope that non-resource parts of the economy will pick up the slack being left behind by diminishing mining investment is quickly fading. Investment coming from outside of the mining sector isn’t nearly enough and it’s clear that businesses aren’t very optimistic, thus we can’t see a meaningful pick up in investment in the near-term.

    Australian economic data highlights how precarious the situation is downunder. Since the bank last met most economic data have underwhelmed market expectations, including the all-important Q4 GDP numbers (the Australian economy grew at just 0.5% in Q4, missing a consensus estimate of 0.6% q/q) and February’s misleading jobs report (the headline figures were good but these were overshadowed by a big drop in the labour force participation rate). Given these negative developments and the fact that the RBA’s language already suggests that it’s looking at cutting the cash rate this month, it seems likely that the bank will cut sooner rather than later.

    A part of one sector of the Australian economy has the potential to keep the RBA on hold

    There’s only one main reason why the RBA shouldn’t loosen monetary policy further, that is the performance of the residential and, to a lesser extent, commercial property prices in certain parts of the country. Of particular concern are the housing markets in Sydney and Melbourne where prices continue to skyrocket. If the RBA were to loosen monetary policy further it has the potential to add fuel to an already dangerously hot property market.

    Clearly there’s a significant amount of risk when it comes to lowering interest rates further, but the risk is localised and contained in Australia’s two largest cities. Even so, is the reward worth the risk? There’s no doubt that the broader economy needs support from both the fiscal and monetary sides of the policy equation. Yet, the RBA has admitted that the flow-on effects of looser monetary policy are significantly diminished at this end of the interest rate spectrum. In saying that, the bank cannot stand idly by while Australia’s economic outlook deteriorates further. What's more, the RBA still has the option of using macro-prudential tools in an attempt to cool property prices.

    The aussie

    A large proportion of the market is banking on the RBA cutting the OCR next week, which means the biggest risk for the AUD appears to be to the upside if the bank elects not to cut. In fact, it may change the currency’s short-term trajectory, assuming commodity prices flatten out. On the downside, we are keeping an eye on the pair’s almost six-year low around 0.7560. If the bank elects to cut the cash rate and maintains its dovish tone then this support zone may crumble and attention will shift to another support zone around 0.7450.


    To leave a comment you must or Join us


    By visiting our website and services, you agree to the conditions of use of cookies. Learn more
    I agree