• Joel

AUD Risk Ahead: RBA Rate Decision Coming Up Next Week

Heads up!

Next Tuesday, at 0530BST/0030EDT, we have the latest rate decision from the Reserve Bank of Australia. The Australian central bank is expected to hold rates at 0.25%, while the parameters of its yield curve control parameters unchanged (3-year Australian government bond yield target of 0.25%).

In a recent speech, the RBA’s Deputy Governor Debelle noted that “the Bank will maintain current policies to keep borrowing costs low and credit available, and stands ready to do more as circumstances warrant”, a sentiment that most analysts expect the RBA to maintain in its statement next Tuesday.

Despite the pledges to do more if necessary, most analysts expect the RBA to maintain a somewhat optimistic outlook on the Australian economy, given that data has surprised to the upside (take this morning’s solid retail sales print),

Moreover, in somewhat of a clap on their own back, the bank is likely to note that its monetary policy appears to be working as expected (Australian financial market volatility has calmed).

With AUDUSD trading just shy of the 0.70 mark, this optimistic message appears to have been priced for some time now. “

Only two weeks ago, RBA Governor Lowe played down RBA concerns over the strengthening of AUD. ING note “as rightly pointed out by Governor Lowe, there is no evidence that the AUD is overvalued - our in-house BEER estimates show an undervaluation of around 10%. However, the current global recessionary environment would surely warrant a much wider risk premium embedded into a quintessentially pro-cyclical currency such as AUD” says ING.

However, more recently, RBA Board member Ian Harper has said that AUDUSD moving back above 0.70 would be unhelpful.

Given the mention of the 0.70 level, markets have started to take an interest into whether the RBA might walk back on Lowe’s comments a few weeks ago and draw a line in the sand for the currency (basically like what Harper did), which would make it harder for the currency to rally above this level.

“If the AUD strength is mentioned, we think this would probably look similar to what the RBNZ did: acknowledging that currency strength poses an obstacle to the economic recovery, but not going as far as hinting at any measures to counter more appreciation. In this case, we expect a negative impact on AUD, although relatively limited in size, in line with the reaction after the last few meetings” says ING.

Conversely, continues the bank, “if no mention of the currency is made and (as widely expected) there is no change in the policy stance/rhetoric, we expect a balanced or mildly positive impact on AUD.”



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