Tomorrow, the RBA gets together to decide whether to cut the cash rate or not.
We’ve had a host of data since the last meeting, including important quarterly inflation data, that the bank will have to process. Then there is the latest cut in rates from the Fed, putting pressure on Australia’s interest rate spread.
However, the safe bet is that the RBA will keep the cash rate the same during the meeting. This consensus is a near-unanimous agreement among analysts both in and outside of Australia.
Then there is the fact that there is no press conference scheduled for after the meeting. This means that Governor Lowe doesn’t think there will be a major shift in policy. Therefore, we will turn our attention to the Monetary Policy Statement published with the rate decision.
But Why So Sure?
Australia’s economy has been underperforming lately, enough to impact job creation.
This is the primary focus for the central bank right now, and they are decidedly unhappy with the evolution of the employment numbers.
A couple of weeks ago, we had disappointing employment change numbers. These showed that Australia created half as many jobs in September as was expected.
However, the unemployment rate dropped a decimal for the first time since it bottomed out in earlier in the year. While this might be seen as positive, it was driven by a two-decimal drop in participation, indicating that the job market remains weak.
On the other hand, last week we had quarterly inflation data, This preferred measure by the RBA showed a substantial increase. With prices finally starting to move in the desired direction, the bank might want to take a pause in their headlong dive into unprecedented low interest rates, and give the economy some room to react.
The Next Steps
The other factor to limit potential future rate cuts is that the RBA has basically said they won’t go below 0.50% unless there is a major change in the situation.
With the rate currently at 0.75%, that means they effectively have only one more rate cut they could do. Like the BOJ last week decided to keep their powder dry, the bank might want to keep at least one round of ammunition going forward.
Even with a pause in the rate-cutting, it doesn’t mean the AUD will get any substantial support, however.
The macro and geopolitical uncertainty persist, despite positive commentary about the pending negotiation between the US and China. October commodity prices showed a substantial 2.4% drop.
Unless some concrete headway is made in trade negotiations by the middle of this month, there isn’t much to suggest that the AUD will turn around it’s prolonged downwards slide.
It’s Down to What the Bank Says
The RBA’s rate statement has been as dovish as possible for the last several meetings. It has projected rates to stay low for an extended period of time.
It’s hard to see how they could be more dovish. So, there doesn’t seem to be much chance of a downward surprise. The consensus is for the statement to be broadly identical to that of last month.
What could move the market is the quarterly monetary policy statement. This will be coming out on Friday, with the RBA’s outlook for the economy.
It will be really interesting to contrast this with the current expectations that there will be a rate cut by the end of February. There are only two more meetings until then.
So, even with the expectation for a hold this time around, the outlook for the AUD in the medium term remains dovish.