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RBA Rate Decision: More Upside for the Aussie?

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Ahead of tomorrow’s rate decision by the Reserve Bank of Australia, the dollar from down under has been getting stronger. Of course it was aided a bit last Friday by some weakness in the greenback after the disappointing jobs numbers. But the rock-solid market consensus on the RBA holding fast once again has started to shake.

While it’s still very unlikely that there will be a change in the actual policy, what investors could fret more about is a change in tone. After the last meeting, the RBA set things up as if rates wouldn’t go higher. But in light of the recent data, there has been an increasing risk that the RBA could suggest that rates might need to tick up a bit. And that is seen as the impetus behind the recent rise in the Aussie.

Chance of a Surprise?

Of course, the more the market prices in the risk of a hike, the more the currency pair would shunt back if the RBA doesn’t carry through with the expected tightening. So, the more the market expects a “surprise”, the more likely it is that there will be a “surprise” in the other direction. That means markets will be lively in the aftermath of the decision, unless the RBA manages to thread a really narrow needle.

So far, economists both in Australia and internationally, all expect that the RBA won’t change its policy. Meanwhile, the market is pricing just a 3% risk of a rate hike. So, any policy change would be a really big surprise to pretty much everyone. The market, it should be noted, still expects another rate hike this year, but not until August.

Driving the Reaction

The issue is whether the accompanying statement or RBA Governor Michelle Bullock give the impression that a rate hike could happen sooner than August. But with the RBA moving to just 8 meetings a year, that is a lot “sooner” than before. In fact, there will be only one more meeting between now and August. So, if the RBA will actually telegraph a rate hike, there is a decent chance some indication of it will happen at this meeting.

What will happen after that is where there are differing views, and that could put some fuzziness around the moves in the currency pair. There are some analysts who expect as many as 3 rate hikes this year, pointing to sticky inflation. Meanwhile, there is a strong minority of economists who suggest as many as three rate cuts this year, pointing to slowing economic growth. There isn’t a well-founded consensus between those two extremes, meaning the market could jostle a bit as it waits to see what direction the RBA takes.

Trying to Pick Sides

Australia hasn’t raised its rates as much as comparable countries, and unsurprisingly still has higher inflation as well. The country has a tight labor market, with the cost of housing pushing up the cost of living. This has left many economists debating whether interest rates are sufficiently restrictive, as higher rates would slow down the housing market and help ease up the main driver of inflation.

On the other hand, more restrictive policy would likely slow economic performance. One of the ways that the RBA could have its cake and eat it too would be to try to hold off on a rate hike as long as possible and potentially reap the benefits of global rate tightening. But the flood of Q1 data coming up could change their mind.

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