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RBA meeting preview - Do the RBA care about AUD strength?

The market is ascribing a 2% chance of a rate cut at tomorrow’s (14:30 AEDT) Reserve Bank of Australia (RBA) meeting.

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bg_aud australian dollar 3
Source: Bloomberg

The economist community echo this belief and not one of the 25 economists surveyed by Bloomberg expect the RBA to ease.

The interesting aspect of the new statement is that this will be the first with Dr Phillip Lowe at the helm. The markets have clearly been enthused at his appointment and it was always going to be an easy adjustment for market participants to deal with.

Specifically, we know Dr Lowe is a keen advocate of financial stability and if that means taking a more gradual path towards reaching the central bank’s 2-3% inflation objective, then so be it. Recent commentary from the newly appointed governor has been to this effect when he detailed that ‘a very quick return of inflation to target at the expense of material deterioration in the health of the private sector balance sheets was unlikely to be in the public interest.’

This is a central banker who is quite comfortable with the Australian economy. He sees risks, especially with private sector debt at 208% of GDP, but leaving monetary policy unchanged for the foreseeable future seems prudent and likely.

So traders will be going through the accompanying statement with interest for any clues on what it may take to see them ease again. The RBA’s view on the AUD will be a focus given the moves in AUD/USD into the top of the recent range.

Recall the board merely suggested that a higher AUD could complicate the adjustment underway in the economy in the prior statement. One suspects that won’t materially alter given the AUD/USD is only around 5% above the RBA’s own ‘fair value’ model. But, if they express a deeper concern that the recent strength in the AUD is impacting their inflation forecasts, traders may be compelled to sell AUDs.

Technically, the AUD/USD is starting to consolidate after the recent rally off $0.7442 on 14 September. On the downside, the pair looks nicely supported into $0.7607 (the 38.2% retracement of the September rally), so I would maintain a positive bias on the pair and look to exit on a close through $0.7607.

I would be expecting a very neutral statement and this seems reflected in market pricing. Take a look at the weekly chart of AUD/USD and you can see price pushing on strong trend resistance. With this in mind, a weekly close above $0.7720 would be a clearly bullish development and suggest increasing confidence in the outlook for the AUD/USD.


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