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By Chris Tedder, Research Analyst, Forex.com

As has become the norm of late, this month’s interest rate decision from the RBA is going to be more about the accompanying speech then the actual decision. Following the RBA’s back-to-back rate cuts earlier this year, the bank has chosen to remain on the sidelines and assess the impact of the aforementioned rate cuts, whilst also keeping a close eye on economic conditions offshore. And, when we take into account that the bank is still on the sidelines and economic conditions offshore haven’t deteriorated massively since the RBA last met, it is easy to see why most investors and economists expect the RBA not to move this month.

What does domestic data look like?

Over the last month Australian economic data has been somewhat mixed, with better than expected employment data but poor retail sales and building approvals figures. Confidence figures, however, are weak across the board, especially consumer confidence which printed at 96.6 for August (below 100 suggests pessimists outweigh optimists). Overall, we can say domestic data provides scope for another rate cut, but isn’t dire enough to force the RBA’s hand. Hence, we don’t the RBA will move this month as it wants to fully assess the impact of prior rate cuts.

Looking ahead, we will be closely watching three areas, all of which could prompt the RBA to cut the official cash rate sooner rather than later. Firstly, if conditions offshore deteriorate significantly it may force the RBA’s hand. And, if domestic data continues to deteriorate, thereby suggesting the prior rate cuts weren’t enough, we expect the RBA to cut as well. Lastly, if commodity prices continue to fall and the aussie doesn’t follow suit, then this is going to weaken key parts of the Australian economy, including the mining sector, which may force the RBA to stgalue the currency by cutting rates, assuming domestic data provides scope for a rate cut (we think it currently does).

What does this mean for the aussie?

Currently, around 50 bps of more rate cut/s this year are priced into the market according to interbank futures. Hence, it would take a significant deterioration in conditions offshore or domestically to cause the market to price in even more rate cuts. However, other factors, like Australia’s deteriorating terms of trade and China’s possible refusal to significantly ease monetary policy, may result in some AUD weakness.

Nevertheless, given that almost everyone is expecting the RBA to remain on hold tomorrow, the reaction to the interest rate announcement if they do in fact remain on hold may be limited. Instead, the market will be focusing on the RBA statement that accompanies the decision in order to gauge the possibility of future cuts by the bank. And, given the uneasy conditions in Europe and the US, as well as the recent soft data prints and the still strong aussie, there is the distinct possibility the RBA will be fairly dovish which, in turn, may result in some AUD weakness. On the other hand, if the bank is less dovish than expected – we don’t think there is any chance of them being hawkish – then there may be a major push towards the aussie, especially when we take into account currently marking pricing (i.e. factor into the equation the 50 bps of cut/s already priced in).

AUDUSD – daily

Source: eSignal