RBA: To hike or not to hike?

Tomorrow, the Reserve Bank of Australia (RBA) will be kicking off October with a bang, as it’ll be releasing its interest rate decision. To borrow some words from Mr. William Shakespeare, the question on every traders’ mind is: to hike or not to hike?

Word on the street is that the RBA will once again raise interest rates. The current rate stands at 4.50%, and a hike of .25% would mark the seventh rate hike by the RBA in the span of just a year. Just a little less than a year ago, the RBA took the big step of being the first major central bank to raise rates.

Some experts believe that with both the November and December rate decision dates falling on holidays, the RBA won’t want to dampen the holiday spirits. And with RBA officials taking a scuba trip in January, a rate hike in February might just be too late.
Before we get ahead of ourselves, let’s take a look at what the statistics have to say, shall we?

Hot off the press, we have the manufacturing index for September which printed at 47.3, lower than its reading in August which was at 51.7. This translated to the first slowdown in the manufacturing sector in 9 months! Some naysayers are taking this as an indication that the strong rise of the Aussie could be offsetting all the lovin’ that Australian manufacturers are getting from the Chinese.

On the other hand, those who take the glass-half-full approach are as giddy as little school girls over the recent GDP figure. It was reported that the Australian economy posted its biggest quarterly increase since 2007 during the second quarter of this year by printing at 1.2%, which beat both the 0.9% forecast and first quarter’s mark of 0.7%.

Making things even sweeter are the labor market stats which show that the unemployment rate fell to 5.1% in August after coming in at 5.3% in July. Analysts had been anticipating a more modest fall to 5.2%. Booyeah! I’m betting that it might have been the 30,900 net increase in the number of workers during the month, which topped the 25,000 consensus, that caused the decline.

If that isn’t enough, in RBA Governor Glenn Stevens‘ latest speech a couple weeks back, he expressed concern about inflation pressures coming back to haunt the Australian economy, having been on the low end for a couple of years now. Hmmm, is that a hawk I hear chirping?

With positive data sprouting from all over Australia and the expectation of a rate hike, could we see AUD/USD finally hit… Wait for it… parity?!? The weekly chart shows that the pair has been making new highs week after week after week with no sign of stopping. In fact, the pair has recently been testing 2-year highs! Judging from price action alone, a rally towards parity could very well be the case by the year ends.

Weekly chart of AUD/USD

Before you turn into a bull and charge the matador, let me give you some words of caution… The market has this knack of being “ahead the curve” with these things. It is quite possible that traders have already priced in their expectations for the upcoming RBA meeting, which means that any rally which stems from a rate hike might not go very far! So, be careful out there!