Last Chance For The RBA This Year

Tomorrow the RBA gets together for the last time this year to discuss policy. The overwhelming consensus is that they will keep the rate on hold. This means our attention needs to turn to the accompanying rate statement. Also, there is no press conference scheduled. This shows that if a rate cut is announced, it will be a surprise to even the Governor at this point.

What Could Move the Market

The Australian dollar could react if there is a change in the policy statement regarding a few key things. Just last week in his speech, Governor Lowe affirmed the current outlook for the bank. This is what we want to keep an ear out for when the rate decision is announced:

• That interest rates will remain low for an “extended period”
• That negative rates were “extraordinarily unlikely”; conventional policy is “still working”.
• The economy is already benefiting from low rates.
• The Board is holding rates while “assessing the growth momentum”, but stands ready to intervene should the situation require it.

We should note that the current consensus is for the RBA’s statement to basically affirm its current stance. Should any of those change, the expectation is that it will be in a dovish direction, which would put pressure on the AUD. Potential examples include dropping the part about assessing growth momentum, which would likely be interpreted as a signal that the bank would cut rates at the next meeting.

The Outlook

Heading into the new year, analysts have given their projections for what the RBA will be doing over the medium term. There isn’t a clear consensus on whether the bank has reached the end of its current easing cycle, or it will eventually dip into negative rates/asset purchases.

There is a consensus of at least one more rate cut sometime in early 2020. From there the views diverge on whether that rate will be maintained for the remainder of the year, or whether there will be a second cut by the end of the year.

Both scenarios project further weakness in the AUD for the rest of the year, and at least the start of 2020.

The Situation

A lot of the outlook hinges on how commodity prices and demand evolve over the next several months. That in turn, depends largely on whether the US and China reach a deal in their trade negotiations. Initially a Phase One deal had been promised by mid-November. Here we are nearing the holidays without even a concrete date for when Trump and Xi could meet.

Commodity prices have been declining over the last couple of months, while Australia’s main export, iron ore is down from the highs that it hit earlier in the year following the suspension of production in Brazil. Still, many analysts are pointing to domestic indicators turning up, such as housing prices and the steady growth in wages.

The next major event is likely to be the release of Q3 GDP data on Wednesday. This is expected to show the growth rate in the economy picked up to 0.8% in the quarter from 0.5%. Annual growth would then be 2.5% compared to 1.4%, and would be finally some solid news to help bolster the AUD.