- The Reserve Bank of Australia is set to leave rates unchanged in its August meeting.
- The RBA weighs global risks against recent upbeat figures in Australia.
- AUD/USD has more chances to drop than to rise in response to the event.
When the US Federal Reserve cuts interest rates – others follow. However, in the Reserve Bank of Australia’s case – it has already slashed rates twice. The RBA is set to leave the Cash Rate unchanged at 1% and pause after two consecutive reductions.
Nevertheless, the Australian dollar may lose ground in response to the Canberra-based institution’s accompanying statement.
Why? The RBA will likely warn about risks to the economy following the intensifying trade war between the US and China. President Donald Trump’s announcement of new tariffs on Australia’s largest trading partner has dampened prospects for global growth.
Moreover, China’s retaliation has immediate detrimental effects to the Australian economy – the devaluation of the yuan makes imports of Australian iron ore and dearer.
The RBA is aware of these developments and will likely warn that it may impact monetary policy. Governor Phillip Lowe will likely open the door to moves in the near future.
With clouds darkening over the global economy, why are economists expecting a hold now? One reason is that the RBA has limited ammunition – rates are already low. The central bank’s policy is limited and it may want to keep some of its rate cuts to cases of emergency – when slashing interest rates may have a more significant impact. This is especially true in case of a sudden revaluation of the Aussie.
Another reason – a more convincing one – is the state of the economy. Australia has enjoyed a robust rise in retail sales – 0.4% in June. Moreover, inflation has returned to healthy levels after a quick dip. The recent figures for the second quarter have shown an increase of 0.6% in the quarterly Consumer Price Index (CPI) and 0.4% in Trimmed Mean CPI.
There are three possible scenarios:
1) No change, hint of further moves
The most probable scenario is that the bank holds its fire now keeps the door wide op cutting rates – even as early as September.
In this scenario, the Aussie may extend its losses as markets speculate how the low Lowe and co. may go.
2) No change in rates, no change in guidance
The RBA may decide not to rock the boat with the statement and provide further guidance when it publishes its Statement of Monetary Policy (SOMP) on Friday.
This scenario, which has medium probability, has already happened in the past. In this scenario, the Aussie may rise – even though markets may fear the bank may push the currency lower later in the week.
3) Surprise cut
To push the currency lower and remain ahead of the Fed, the RBA may surprise by reducing the cash rate to 0.75%. It is essential to note that the bank has surprised investors in the past with both hikes and cuts.
In this case – which has a low probability – AUD/USD will likely fall sharply.
The RBA is set to leave interest rates unchanged when it announces its decision on August 6th at 4:30 GMT. However, the bank may push the Aussie down by warning that the global slowdown may result in rate cuts down the road. Other scenarios are leaving the statement unchanged and boosting AUD/USD, and another one that cannot be ruled out is surprising with a rate cut.Get the 5 most predictable currency pairs