RBA to Stand Pat with Bank’s Communication to Drive the Aussie; Trade Remarks Eyed

Fundamental analysis of Forex market

The Reserve Bank of Australia will be deciding on rates next week, with a policy decision scheduled to be made public on Tuesday at 0430 GMT. No change in rates is anticipated, with the focus falling on the Bank’s level of optimism on the economy as expressed in the statement accompanying the decision; the Aussie will react accordingly.  

It appears virtually certain that Australia’s central bank will maintain its policy rate at the record low of 1.50% for the 24th straight meeting, this being the longest stretch without an interest-rate move in the nation’s modern history. Moreover, the latest Reuters poll shows economists expecting this to continue for the foreseeable future, with a quarter percentage point hike not predicted to come before end-2019.

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The country’s inflation stood at 2.1% y/y in Q2, re-entering the RBA’s target band of 2-3% for the first time since Q1 2017. This is definitely a positive development, though it should be kept in mind that the rise was largely owed to elevated energy prices. Moreover, inflation merely rests within the lower bound of the RBA’s target range, overall not justifying action – a rate increase – by the central bank.

Another factor limiting the Bank’s ability to normalize rates is that a number of the country’s commercial banks decided to raise their mortgage rates fairly recently. In effect, this has similar effects to an RBA rate hike. Namely, it is seen as squeezing already indebted households’ ability to spend and is thus a potential threat to economic growth; a central bank rate increase would only make things worse for Australian consumers.

Given that a move in rates is seen as off the table, the Bank’s communication will dictate positioning on the Aussie. In this respect, recent data releases including a Q2 GDP beat and better-than-forecasted employment figures in August may suggest that a relatively rosy outlook is to be projected by the RBA. Taking away from this though is the ongoing trade dispute between the US and China – the latter is Australia’s largest export destination – and still near record low wage growth despite employment blowing past the most optimistic estimates in August and the unemployment rate remaining at a six-year nadir. Commentary by policymakers on all these will be closely watched.

An upbeat tone by the RBA is likely to boost AUDUSD. Resistance to an advancing pair may take place around the current level of the 50-day moving average at 0.7287. Not far above lies the 23.6% Fibonacci retracement level of the downleg from 0.8135 to 0.7083 at 0.7332, while stronger gains may meet a barrier around the 100-day MA at 0.7382; notice that the region around this point was relatively congested between late June to early August.

Conversely and in case of a relatively cautious RBA, declines would bring into scope 0.7083, the pair’s lowest since February 2016 hit on September 11. Steeper losses would turn the attention to the 0.70 mark that may be of psychological importance. It should be kept in mind that a double top from September last year and January-February of the current year on the weekly chart projects towards the 0.69 handle.

Lastly, beyond RBA remarks on global trade and the risks posed on Australia’s economy by a deteriorating trade outlook, actual developments on this front will also be eyed; intensifying tensions are expected to weigh on the Aussie and vice versa. The latest tariff exchange between the US and China taking effect on Monday, the latter opting to abstain from planned trade talks between the two sides, and the former signaling that the 10% levies on $200 billion of Chinese imports would rise to 25% starting 2019 as well as threatening duties on an additional $267 billion of Chinese goods, all suggest that the trade situation is more likely to exert downside pressure on the Australian currency rather than the other way around, at least for the time being.