RBA Preview: this is a crucial week for the AUD

1 June, 2015

The Reserve Bank of Australia is widely expected to leave the official cash rate at 2.00% at its policy meeting on Tuesday, with all 28 economists surveyed by Bloomberg predicting the bank to remain on hold and the OIS market is only pricing in around a 15% chance of a 25 basis point rate cut tomorrow, despite last week’s soft private capital expenditure data out of Australia.

The RBA cut interest rates at its last meeting in May, but it gave no real indication that it is preparing to loosen monetary policy further in the near-term. In fact, the bank pretty much removed its easing bias at that meeting, before clarifying later that a lack of guidance shouldn’t be considered an indication that it’s ruling out the possibility of another rate cut. Also, in its latest quarterly Monetary Policy Statement (MPS) the RBA downgraded its inflation and growth forecasts for 2015/2016, after already downgrading them in February. It cut its June 2016 core inflation estimate to 1.75%-2.75% vs. 2%-3% in February. It also dropped its 2015-2016 growth estimate to 2%-3% from 2.5%-3.5%. At the same time it said that the economy would grow at a below average pace for longer than earlier anticipated and that the unemployment rate will peak slightly later than previously expected (6.5% in mid-2016).

The downgrade to Australia’s inflation and growth outlooks was followed later in May by much softer than expected capital expenditure figures from the private sector. Total CAPEX decreased 4.4% in Q1, even worse than the market’s expectations for a 2.2% fall. Also, estimate 2 for 2015-2016 came in 24.6% lower than the same estimate for 2014-2015, with the estimate from miners falling 34.9% over the same period. In fact, the report was weak enough for some market forecasters to suggest that Australia’s CAPEX outlook is now at recessionary levels - total private capital expenditure in 2015-2016 is now predicted to be 104,033m, although we are expecting this to rise in future estimates.

The RBA, and the market for that matter, needs to see more signs of life in non-resource parts of the economy to help pick-up the slack from diminishing mining investment. However, businesses are unlikely to ramp-up spending plans or increase wages without an increase in confidence, both from consumers and other corporates. As long as confidence remains depressed, spending and wage growth are likely to remain subdued, which limits the growth potential of the broader economy. In brief, without activity at the ground the ground level, non-resource parts of the economy are going to struggle.

So, why aren’t we expecting the RBA to loosen monetary policy anytime soon?

The RBA isn’t expected to loosen monetary policy any further this time around because it wants to assess the impact that prior easing is having on the economy before moving interest rates in either direction, and it’s also concerned about a ballooning property bubble in Sydney and it has admitted that further cuts at this end of the policy spectrum, and while confidence remains depressed, have a reduced positive impact on the economy. Overall, the policy calculator states that the combination of some minor signs of life in the domestic economy, the threat of distending property prices in Sydney, a weaker exchange rate and the easing yet to find its way into the real economy offset the diminished positive impact that further policy loosening would have on distressed parts of the broader economy.

Market reaction

With the vast majority of the market expecting the bank to remain on hold this time around, the focus will be on RBA Governor Stevens’ accompanying statement. Stevens isn’t expected to rock the boat and should maintain a mild dovish bias as the board assesses the impact of prior policy loosening. We expect the bank to reiterate that the Australian dollar remains high, despite recent weakness in the commodity currency, but it may indicate that it’s approaching more disable levels for economic expansion, especially given a recovery in iron ore prices last month.

The reaction of the Australian dollar to the policy meeting greatly depends on Stevens’ tone. With the market not really expecting much from the bank this month or next month, a more dovish tone this time around, underpinned by the soft CAPEX data, may result in a push away from AUD as the market brings forward its loosening timetable. Although, our base case is that the RBA maintains the status quo, as it may want to keep its options open given Australia’s uncertain economic outlook, which could lead to a short-term relief rally in AUD.

Source link  
Gold surges to major $1250 resistance as uncertainty prevails

Gold surged Thursday on a breakout of its previous consolidation to hit and slightly exceed major technical resistance at $1250, a level not seen since early November...

Gold remains vulnerable amid hawkish Fed, strong dollar, equity highs

Gold has climbed sharply since the beginning of the year as the US dollar has pulled back from its late-2016 highs and the US Federal Reserve has exercised characteristic restraint in raising interest rates further after the last rate hike in December...

Gold well-supported on safe-haven flows, lagging dollar

Increasing political and economic uncertainties under the new Trump Administration, coupled with a sliding US dollar since the beginning of the year, have led to a sharp rise in gold prices for more than a month...

Gold pressured as dollar and equities remain supported

As the US dollar found some new life on Thursday and US equity markets hovered right around their new all-time highs, gold extended its recent pullback well below the $1200 handle. Since late December, the price of gold had been in a sharp relief rally from its 10-month lows around $1125 support...

Crude oil maintains bullish trend

Oil prices were initially weaker at the start of the new week, but they have now recovered to trade almost flat at the time of this writing. At the weekend, the OPEC and some producers outside of the group met to discuss the progress of their oil production deal...

Trump press conference fails to deter equity bulls

President-Elect Donald Trump spoke on Wednesday morning at his first formal press conference since the November elections, and the markets were all ears. Trump covered a lot of ground with multiple topics that included...

Gold ripe for potential relief rally

The charts tell a clear story of the unrelenting plunge in gold prices since early November. This steep dive has been the result of several related factors, all of which have the potential to extend well into the new year. These largely Trump-driven factors include...

Could EUR/USD finally break 1.05 on this FOMC day?

The market is demanding a rate rise and the Fed better deliver it today, for if it doesn’t the bank’s credibly will be severely damaged. There is really no excuse not to do so. Economic data has been improving, financial markets are calm...

Mixed Jobs Report Keeps High Fed Expectations Intact

As we noted the day before Friday’s US jobs report, only a significantly worse-than-expected reading for November would have likely made the Federal Reserve’s next interest rate decision more difficult...

In the past 24 hours Bitcoin has lost -8.93% and reached $4452.26474635. Open your trading account with the best cryptocurrency brokers on special terms today.

In the past 7 days the EUR/USD pair has lost -1.1164% and is now at $1.13. Start trading and making money on Forex today.

In the past 7 days Ethereum has lost -37.01% and is now at $130.192880136. Have the most popular cryptocurrencies compared online 24/7.

Top Brokers offering Forex Market Analysis

Forex Currencies Forecasts

Top 10 Forex Brokers 2018

# Broker Review
6FIBO GroupFIBO Group83%