RBA Preview: what to expect from this week’s RBA meeting

The economic data that matters:

What are the key themes to watch out of this RBA meeting?

Will the coronavirus force an RBA cut?

The markets are strongly pricing in an interest rate cut from the RBA at this meeting. In response to the economic devastation expected to be brought about by the coronavirus, especially to the Chinese economy, market participants are pricing-in a nearly 87.5% chance of a cut at this meeting. This is up from barely a 7% chance being given for a cut this meeting less than a week ago. The markets are looking for an insurance cut; the RBA will likely find it difficult to hand one over, given the markets overwhelming expectation for one.

Can the Australian economy handle an external shock?

Even before the coronavirus became a world-wide panic, the Australian economy was performing, and was expected to perform in the future, tepidly, at best. Whatever the policy decision, the RBA will be looking to deftly handle the way it delivers its messaging. Overall growth conditions are poor, with GDP data out Wednesday expected to show annualized growth of 2%. On top of that, the Australian consumption is in a soft state, with wage growth and high household indebtedness keeping consumer confidence low. Markets will be highly sensitive to what the RBA says about how strained demand may weather the coronavirus-shock.

Does the policy outlook for 2020 change now?

The coronavirus outbreak has flipped market expectations for future RBA policy on its head. After the RBA’s first meeting for 2020 last month, market participants were pricing in only 1 rate cut from the RBA this year. The expected hit to the Australian economy from the coronavirus has the market now betting that the RBA will cut to its “effective lower bound” by October this year. Given the heightened odds of recession brought about by the coronavirus, that puts an Australian QE program right back on the agenda, especially given the markets clear desire for an emergency rate cut this week.

How could the RBA meeting impact the financial markets?

Australian Dollar

The AUD has been heavily hit by the coronavirus outbreak. It’s trading at 11-year lows, as market participants price-in a major slowdown to global economic growth. The A-Dollar’s pain was only compounded last week as the market began to bake in an RBA cut this week, trading well into the 64-cent handle. Given the high chance of a rate cut, and the extreme sense of fear in the markets right now, there’s some signs that the AUD is slightly oversold, and all the bad news is already priced-in. Given the bearishness pervading the market however, a further push lower in the Australian Dollar cannot be dismissed.

ASX200

Just like stock markets the world over, the ASX 200 hit its recent record highs not on overwhelmingly strong fundamentals, but because of very accommodative monetary policy. The RBA may well cut rates this week, but unlike the response to the central bank’s easing in 2019, it is unlikely to stoke last upside in the ASX200. Implied volatility across the ASX is broadly unconducive to risk taking, as investors seek safety ahead of all else. The best that might be asked for the stock market out of this RBA meeting is a rate cut and an ultra-dovish policy bias. That may staunch at least a small portion of the ASX200.