Will the RBA surprise the market for a third time? – Forex News Preview
June 30, 2023 1:27 pm
On Tuesday, at 04:30 GMT, the Reserve Bank of Australia (RBA) will announce its July monetary policy decision. After two consecutive surprise hikes, most market participants believe that policymakers will step to the sidelines this time, but economists foresee a 25bps hike by a very slim majority. Will the RBA go against market bets for the third time in a row?
The RBA confounded market bets in May and June
At its June meeting, the RBA caught the market off guard for a second straight time, raising the cash rate target by 25bps to 4.10% and noting that some further tightening may be required to ensure that inflation returns to target in a reasonable timeframe, but also that this will depend upon how the economy and inflation evolve.
Although there had been some expectations that the RBA could hit the hike button due to the rebound in the monthly year-on-year inflation print for April and the increase in the country’s minimum wage by 5.75%, most market participants were expecting officials to stay sidelined just after the May hike.
Inflation slows abruptly in May
Since then, GDP data showed that the economy slowed by more than expected in Q1, but also that the labor market gained more jobs than forecast in May, which pushed the unemployment rate down to 3.6% from 3.7%. Both the preliminary manufacturing and services PMIs came in better than expected, but the manufacturing index stayed in contractionary territory and the services one slid to just seven tenths of a point above the 50-stagnation mark.
Most importantly, the monthly y/y CPI rate for May dropped to 5.6% from 6.8%, extending the downtrend that started after the rate peaked at 8.4% in January. Yes, retail sales for the same month grew 0.7%, but the y/y rate slightly dropped to 4.22% from 4.25%, which is the slowest annual increase since September 2021.
Investors see an August hike as more likely
With all that in mind, investors are confident that two more quarter-point hikes may be on the cards by this central bank, but they assign only a 37% chance for a hike at this gathering. The remaining 63% probability points to no action, which appears reasonable pricing given the abrupt slowdown in inflation in May. Although the headline CPI rate is still well above the upper bound of the RBA’s 2-3% target range, officials may prefer to wait for more data to see whether past hikes could still weigh on price pressures.
That said, a very slim majority of economists polled by Reuters are expecting a 25bps hike next week, while an August increase seems more sensible to the eyes of investors, who are nearly certain according to their implied rate path.
Asymmetrical risks surround the aussie
Therefore, should officials decide to take the sidelines, the aussie is unlikely to fall much, especially if they clearly telegraph an August hike. For the currency to fall sharply, the Bank may need to take the sidelines and adopt a softer language about its future plans than it did in June. Nonetheless, taking into account the data, this seems a very unlikely scenario.
Now, in case the RBA does not hesitate to go against market bets for a third consecutive time and decides to press the hike button, the aussie is likely to rally. Given the current market pricing and the fact that the aussie has fallen around 4.5% against its US counterpart in the last two weeks, a rally due to a hike could be larger than a potential slide due to a hawkish pause. In other words, the risks may be asymmetrical.
Aussie/dollar trades within a range
Aussie/dollar fell sharply the last couple of weeks, returning within, and even approaching the lower bound of a sideways range that’s been containing most of the price action since February 24. A potential decline below that lower bound of the range at 0.6575 could paint a darker picture and perhaps set the stage for declines towards the 0.6490 barrier, which offered support in May.
On the upside, a potential rebound due to a hike could result in a test at the high of June 27 at 0.6720, but with the rate still within the aforementioned range, the outlook is unlikely to be considered bullish. For the picture to brighten a break above 0.6795 may be needed.
On Tuesday, at 04:30 GMT, the Reserve Bank of Australia (RBA) will announce its July monetary policy decision. After two consecutive surprise hikes, most market participants believe that policymakers will step to the sidelines this time, but economists foresee a 25bps hike by a very slim majority. Will the RBA go against market bets for the third time in a row?
The RBA confounded market bets in May and June
At its June meeting, the RBA caught the market off guard for a second straight time, raising the cash rate target by 25bps to 4.10% and noting that some further tightening may be required to ensure that inflation returns to target in a reasonable timeframe, but also that this will depend upon how the economy and inflation evolve.
Although there had been some expectations that the RBA could hit the hike button due to the rebound in the monthly year-on-year inflation print for April and the increase in the country’s minimum wage by 5.75%, most market participants were expecting officials to stay sidelined just after the May hike.
Inflation slows abruptly in May
Since then, GDP data showed that the economy slowed by more than expected in Q1, but also that the labor market gained more jobs than forecast in May, which pushed the unemployment rate down to 3.6% from 3.7%. Both the preliminary manufacturing and services PMIs came in better than expected, but the manufacturing index stayed in contractionary territory and the services one slid to just seven tenths of a point above the 50-stagnation mark.
Most importantly, the monthly y/y CPI rate for May dropped to 5.6% from 6.8%, extending the downtrend that started after the rate peaked at 8.4% in January. Yes, retail sales for the same month grew 0.7%, but the y/y rate slightly dropped to 4.22% from 4.25%, which is the slowest annual increase since September 2021.
Investors see an August hike as more likely
With all that in mind, investors are confident that two more quarter-point hikes may be on the cards by this central bank, but they assign only a 37% chance for a hike at this gathering. The remaining 63% probability points to no action, which appears reasonable pricing given the abrupt slowdown in inflation in May. Although the headline CPI rate is still well above the upper bound of the RBA’s 2-3% target range, officials may prefer to wait for more data to see whether past hikes could still weigh on price pressures.
That said, a very slim majority of economists polled by Reuters are expecting a 25bps hike next week, while an August increase seems more sensible to the eyes of investors, who are nearly certain according to their implied rate path.
Asymmetrical risks surround the aussie
Therefore, should officials decide to take the sidelines, the aussie is unlikely to fall much, especially if they clearly telegraph an August hike. For the currency to fall sharply, the Bank may need to take the sidelines and adopt a softer language about its future plans than it did in June. Nonetheless, taking into account the data, this seems a very unlikely scenario.
Now, in case the RBA does not hesitate to go against market bets for a third consecutive time and decides to press the hike button, the aussie is likely to rally. Given the current market pricing and the fact that the aussie has fallen around 4.5% against its US counterpart in the last two weeks, a rally due to a hike could be larger than a potential slide due to a hawkish pause. In other words, the risks may be asymmetrical.
Aussie/dollar trades within a range
Aussie/dollar fell sharply the last couple of weeks, returning within, and even approaching the lower bound of a sideways range that’s been containing most of the price action since February 24. A potential decline below that lower bound of the range at 0.6575 could paint a darker picture and perhaps set the stage for declines towards the 0.6490 barrier, which offered support in May.
On the upside, a potential rebound due to a hike could result in a test at the high of June 27 at 0.6720, but with the rate still within the aforementioned range, the outlook is unlikely to be considered bullish. For the picture to brighten a break above 0.6795 may be needed.
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