What Will The RBA Do Tomorrow?

So far this year, the AUD has been on the backfoot, retreating compared to most other currencies.

There are several reasons, as usual. Some of them are completely unexpected (coronavirus) while others were projected ahead of the last RBA meeting. Now the question is how far that trend will continue.

The next step is coming up tomorrow. The RBA is meeting for the first time this year to set its monetary policy.

A rate cut would likely continue that descending trend, on the back of disappointing economic performance and worries that what green shoots there are, won’t last. But, what are the chances of that happening?

What We Are Expecting

The latest survey of international economists shows that three-quarters of them are expecting the RBA to hold rates. That’s a pretty strong consensus! But, when only Australian economists are polled, the confidence goes up to 87%.

In fact, the market has been pricing in a rate hold all last week. The balance is showing just a 14% chance of a rate cut as we emerge from the weekend. The rationale is that the central bank is happy with the latest employment data, and doesn’t want to rock the boat yet.

With the markets pricing in the RBA keeping everything on hold, the rate decision itself is likely to not move the market much. That is, of course, unless there is a surprise.

Apparently, that would also surprise Governor Lowe, since no post-policy-change press release is scheduled.

All Hail the Rhetoric

What’s likely to influence the market the most is the rate statement that comes out at the same time as the decision.

Traders are going to want to know if there are any changes in outlook. The market is likely to be reassured if the statement repeats three important ideas:

  1. That interest rates will stay low for an “extremely long time”
  2. That unconventional measures are not necessary, and traditional policy is “working”
  3. That the RBA is “assessing growth momentum”

It’s not likely the first will change, but potential changes in wording that might move the markets include that:

  1. Conventional measures are being considered or might be necessary
  2. The RBA is considering policy changes, instead of simply assessing momentum, or potentially giving a parameter for what they consider sufficient growth

The markets would likely interpret both of those changes as dovish. And this would likely weaken the AUD.

On the other hand, if everything remains the same, it puts off for a month the potential of RBA-driven weakness in the AUD and could provide some support.

Going Forward

Analyst evaluations remain the same. They conclude that a rate cut by the RBA is likely in the first quarter of the year, but that it won’t happen until the next meeting at the earliest.

In that respect, Thursday’s Retail Sales might have more weight on the direction of the currency, since the market is likely waiting until after the meeting to price in the expectations for that data.

About the Author
“John Benjamin Resident Analyst at Orbex. John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.” [space height="10"] At Orbex, we are dedicated to serving our clients responsibly with the latest innovations in forex tools and resources to assist you in trading. Please Director at Visit our site for more details.

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