Looking Forward to RBA Rate Decision
This is an important week in terms of data for the AUD, but tonight we have the most important event of the month: the rate decision by the RBA. After last month’s “dovish hold” and the economic data we got over the last weeks, the consensus has shifted now to strongly favor a rate cut.
With the market expected to price in a rate cut ahead of the event, the really important event is going to be Governor Lowe’s speech five hours after the rate decision is announced. Analysts will be scrutinizing his remarks for any clues about another rate hike, or if this is going to be a “hawkish cut”.
What’s Coming Up
Before the RBA concludes its meeting, we have some important data that could move the currency by itself and change some of the math ahead of the RBA decision: Retail Sales data for May.
Current expectations are for retail sales to repeat last month’s 0.3% growth. This would be in line with the trend for well over a year and would keep expectations for a rate cut intact. However, a sudden increase in retail sales above 0.5% could be a sign of increasing inflation, and that might incline the RBA to wait another month before pulling the trigger.
The Bank’s Attitude
Remember that the RBA is a notoriously conservative bank, which has a general bias towards keeping rates higher than comparable economies. They are much more likely to look for excuses in the data to keep the rate on hold than other banks would in similar circumstances.
The election is still a factor this time around as well; with many analysts speculating that the RBA would have cut rates last time but did not want to change course in the middle of an electoral period. A reflection of that is how their sister bank, the RBNZ, cut rates last month. However, the positive response in the markets to the surprise results of the election could change the outlook, and the RBA might want to see if the “soft data” (equities, bonds) translates into economic indicators.
If the bank were to cut, it would be to a record low of 1.25%. Most analysts and traders think that the market would be shocked if the RBA doesn’t cut, which means that it wouldn’t have as much impact on the market as if it were so unexpected. If the bank were to hold, it would expose a significant upside for the AUD.
The governor is expected to release a statement along with the decision, and that’s what’s expected to move the market. The key bit of data traders will be listening for is regarding the next rate cut.
The Outlook is Key
There is a pretty broad consensus as well that there will be another rate cut, with August being the most commonly cited date. If Lowe downplays the potential of another rate cut, or hints at it being near the end of the year, then we could see the AUD get stronger.
There are analysts out there talking about three rate cuts this year, and JP Morgan went so far as to say four cuts by mid-2020. This would be an indication that the market is getting a bit ahead of itself in a rush towards bearishness. The thing is, though, that lately data from Australia has been better (or at least, not as bad), exposing upward risk for the Aussie.