RBA’s Rate decision tomorrow likely to be a close call

The Reserve Bank of Australia is due to meet early tomorrow for its monthly monetary policy review. The decision for the interest rates at tomorrow’s meeting is likely to be a very close call as recent inflation numbers could see the RBA board divided between taking a pre-emptive rate cut measure or follow a wait-and-watch approach.

Although headline quarterly inflation came in at 0.5%, the trimmed mean CPI touched an all time low at 0.3%. Consumer prices increased 1.5% on an annualized basis for the year to the September quarter of 2015 largely staying unchanged.

The housing markets on the other hand have managed to ease some of the pressures, which until the second quarter of the year was proving to be a major issue for the RBA as foreign investors continued to invest heavily in real estate sending prices higher. Earlier in October, four of the biggest domestic banks in Australia increased their variable mortgage lending ranges by 15bps – 20bps, in what seems to be a tightening of monetary conditions. While some speculated that this could trigger a rate cut from the RBA, the combined effect from increasing the variable mortgage lending rate is expected to be less than 10bps which could keep the RBA from pulling the trigger.

On a broader scale, there is a big chance that the RBA could keep its policy on hold in light of the recent hawkish statement sent from the US Federal Reserve. However considering that the next RBA meeting is due on December 1st, ahead of the FOMC meeting, the RBA could potentially look at delivering a rate cut in any of the upcoming two monetary policy meetings.

In the mean time, Federal Reserve Chair, Janet Yellen has at least three scheduled events where she is due to speak, which should give the markets a lot of time in preparation for an impending December rate hike, albeit the decision is likely to be taken only if the US economic data is supportive for rate hikes.

While tomorrow’s RBA decision is a very close call, the chances are that the Australian central bank will stand pat tomorrow and instead wait for more data flows from Australia while also keeping an ear out to the Fed speak in the coming weeks. Also this week, the RBA will be releasing its quarterly monetary policy statement which is likely to shed further light on the RBA’s course of action into December.

AUDUSD – Technical Outlook

AUDUSD has closed October on a modestly bullish note but the weekly price action remains subdued. There is however the bullish divergence on the Stochastics which cannot be ignored following the break of the falling trending line connecting the highs of 0.9378 from 31^st August 2014, and the 0.8035, the lower close from 5^th September. For the moment, prices seem to have formed a strong bottom near 0.6913 and as long as this low from 30^th August 2015 is not broken, AUDUSD could look towards a possible correction to 0.76 at the very least.

The AUDUSD long term technical outlook therefore points to potential medium term strength in the Aussie ahead of the larger bearish trend being resumed in the longer run.