- The RBA is set to leave rates unchanged, but the tone of the statement matters.
- The Aussie is somewhat vulnerable despite hopes for a trade deal.
- The event could also serve as a hint towards the GDP report.
The Reserve Bank of Australia makes its rate decision on Tuesday, March 5th, at 3:30 GMT.
Recent RBA action – a dovish twist
After a summer break in January, the RBA met in February. Not only did they leave the rates unchanged as expected, but also the statement was left mostly untouched. The lack of movement surprised markets. After two months of non-stop concerns about global markets and a deterioration in China, many had expected a dovish hint. The Australian Dollar rose.
But the doves were released soon thereafter. Governor Phillip Lowe said that the chances of a rate hike and a rate cut are more balanced, a marked shift from his previous words that interest rates will likely rise. His words sent the Aussie tumbling down.
And then came the Statement of Monetary Policy (SOMP) which cast a darker picture over the economy, weighing on the A$.
Australia still enjoys a bustling labor market but suffers from a downturn in housing, and a slowdown in China. The world’s No. 2 economy and Australia No. 1 trading partner has been showing signs of fatigue both in hard data such as the slowest GDP growth in 28 years and in soft data. The PMI figures are pointing to contraction in the manufacturing sector.
A change in the statement?
The RBA is set to leave the Cash Rate unchanged at 1.50% and the focus remains in the statement. If the RBA tilts the language towards the concerns, reflecting the recent tone from Lowe and the SOMP, the Aussie has more room to slide.
If they leave it unchanged, AUD/USD will have room to the upside. However, if the statement remains unchanged once again, markets may begin ignoring these rate decisions, until Lowe and co. surprise markets with an actual move rather than a change in the wording.
Apart from any comment on interest rates, housing, the labor market, wages, and the global economy will be of high interest.
Any comments about growth will also be closely watched. Australia releases the GDP data fewer than 24 hours later and the Canberra-based institution will have the data before their eyes. Growth substantially decelerated to 0.3% QoQ in Q3 after around 1% in the previous quarters. A small pickup is on the cards now: 0.4%.
If the RBA is upbeat about economic expansion, expectations towards the GDP report will rise. If they are wary of poor results, projections may slide.
The Australian Dollar has been under pressure from the aforementioned RBA developments and from other issues. Despite optimism about a US-China trade deal, Aussie/USD did not recover. Weak US data and upbeat Australian jobs figures only had an ephemeral impact. This failure to bounce exposes the currency pair’s weakness.
Will the RBA take advantage of this situation to push the pair even lower with a dovish statement? This has happened the past and may happen again.
In any case, AUD/USD has more chances of falling than rising, given current trends.Get the 5 most predictable currency pairs