RBA meeting: Cautious language and rate cut hints – Forex News Preview
February 28, 2020 2:26 pm
The Reserve Bank of Australia (RBA) will wrap up its policy meeting early on Tuesday, at 03:30 GMT. Markets assign a 20% chance for an immediate rate cut, so if the RBA keeps policy unchanged, the aussie could spike higher on the decision. That being said, policymakers will probably strengthen their easing bias and send clear signals that rates may be cut as soon as April, so any positive reaction might remain short lived and the devastated currency could resume its downtrend before long.
China sneezes
The aussie has taken a real beating lately, collapsing to 11-year lows against its American cousin as investors priced in a severe slowdown in China due to the virus outbreak, which would inevitably take its toll on the Australian economy as well. China is Australia’s closest trading partner, so if Chinese growth takes a real hit, so does Australian growth.
It’s not just the trading relationship. China is the biggest consumer of commodities in the world, so if its economy craters then commodity prices plunge, further hurting Australia that exports raw materials. On top of all this, Australia has also banned Chinese tourists from entering the country due to contagion fears. That will probably kneecap the nation’s hospitality industry, which relies on Chinese visitors.
The domestic outlook is just as worrisome. The unemployment rate jumped to 5.3% in January from 5.1% previously, pouring cold water on the RBA’s hopes that it would decline over time as the labor market tightened. Meanwhile, capital expenditure and construction data for Q4 disappointed, pointing to a weak GDP print for that quarter, which will be released on Wednesday at 00:30 GMT.
The point is that the economy was already losing momentum before the virus outbreak, so the situation may be far worse now.
Matter of time before RBA cuts?
Bearing all this in mind, investors are betting the RBA will need to add more stimulus soon to support the economy. The implied probability for an immediate rate cut at this meeting is just 20%, though that number jumps to 55% for the April meeting, while a cut is fully discounted by June.
If anything, a rate cut could come sooner than June. The minutes of the RBA’s last meeting showed optimism that the virus shock in China would be short-lived – and it hasn’t been. Much of China’s economy is still shut down, travel bans are still in place, and there’s no telling when things will go back to normal. To make matters worse, the virus is spreading to other countries quickly, threatening to dampen economic activity globally.
As such, the RBA is likely to strengthen its easing bias next week. Officials could make it clear that unless something drastic changes soon, then rates will probably be cut again before long.
Turning to the market reaction, the fact that some investors are looking for an immediate cut suggests that the knee-jerk reaction in the aussie might be higher if the RBA indeed keeps rates unchanged. That being said, any positive reaction is unlikely to be sustained for long. Clear signals that rates may be cut soon would push the probability for an April cut higher and by extension, drag the battered aussie lower again.
Why not cut rates immediately?
Two main reasons. First, the RBA doesn’t want to overreact to any short-term shock, so the officials might prefer to examine February data as well before pulling the trigger.
Second, the RBA is worried that lower rates will encourage more borrowing in the housing market, pushing house prices even higher and amplifying the risk of a ‘bubble’. That’s a reasonable concern, but if the RBA really wants to cut rates to support the broader economy, it can always introduce some so-called macroprudential measures to limit excessive housing borrowing. Therefore, this factor alone won’t keep the RBA sidelined for long.
Taking a technical look at aussie/dollar, a potential rebound could meet initial resistance near the 0.6540 area.
On the downside, another wave of losses might stall around 0.6410, a level defined by the low of March 12, 2009. Even lower, the March 2009 trough of 0.6290 could halt any declines.
The Reserve Bank of Australia (RBA) will wrap up its policy meeting early on Tuesday, at 03:30 GMT. Markets assign a 20% chance for an immediate rate cut, so if the RBA keeps policy unchanged, the aussie could spike higher on the decision. That being said, policymakers will probably strengthen their easing bias and send clear signals that rates may be cut as soon as April, so any positive reaction might remain short lived and the devastated currency could resume its downtrend before long.
China sneezes
The aussie has taken a real beating lately, collapsing to 11-year lows against its American cousin as investors priced in a severe slowdown in China due to the virus outbreak, which would inevitably take its toll on the Australian economy as well. China is Australia’s closest trading partner, so if Chinese growth takes a real hit, so does Australian growth.
It’s not just the trading relationship. China is the biggest consumer of commodities in the world, so if its economy craters then commodity prices plunge, further hurting Australia that exports raw materials. On top of all this, Australia has also banned Chinese tourists from entering the country due to contagion fears. That will probably kneecap the nation’s hospitality industry, which relies on Chinese visitors.
The domestic outlook is just as worrisome. The unemployment rate jumped to 5.3% in January from 5.1% previously, pouring cold water on the RBA’s hopes that it would decline over time as the labor market tightened. Meanwhile, capital expenditure and construction data for Q4 disappointed, pointing to a weak GDP print for that quarter, which will be released on Wednesday at 00:30 GMT.
The point is that the economy was already losing momentum before the virus outbreak, so the situation may be far worse now.
Matter of time before RBA cuts?
Bearing all this in mind, investors are betting the RBA will need to add more stimulus soon to support the economy. The implied probability for an immediate rate cut at this meeting is just 20%, though that number jumps to 55% for the April meeting, while a cut is fully discounted by June.
If anything, a rate cut could come sooner than June. The minutes of the RBA’s last meeting showed optimism that the virus shock in China would be short-lived – and it hasn’t been. Much of China’s economy is still shut down, travel bans are still in place, and there’s no telling when things will go back to normal. To make matters worse, the virus is spreading to other countries quickly, threatening to dampen economic activity globally.
As such, the RBA is likely to strengthen its easing bias next week. Officials could make it clear that unless something drastic changes soon, then rates will probably be cut again before long.
Turning to the market reaction, the fact that some investors are looking for an immediate cut suggests that the knee-jerk reaction in the aussie might be higher if the RBA indeed keeps rates unchanged. That being said, any positive reaction is unlikely to be sustained for long. Clear signals that rates may be cut soon would push the probability for an April cut higher and by extension, drag the battered aussie lower again.
Why not cut rates immediately?
Two main reasons. First, the RBA doesn’t want to overreact to any short-term shock, so the officials might prefer to examine February data as well before pulling the trigger.
Second, the RBA is worried that lower rates will encourage more borrowing in the housing market, pushing house prices even higher and amplifying the risk of a ‘bubble’. That’s a reasonable concern, but if the RBA really wants to cut rates to support the broader economy, it can always introduce some so-called macroprudential measures to limit excessive housing borrowing. Therefore, this factor alone won’t keep the RBA sidelined for long.
Taking a technical look at aussie/dollar, a potential rebound could meet initial resistance near the 0.6540 area.
On the downside, another wave of losses might stall around 0.6410, a level defined by the low of March 12, 2009. Even lower, the March 2009 trough of 0.6290 could halt any declines.
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