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.

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.

Westy-RBA-meeting-preview-031016

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.