RBA to Take a Breather?

Tomorrow, the trend-setting Reserve Bank of Australia will be releasing its interest rate decision. By now, you’d know that the RBA has been leading the way in terms of interest rates, with its cash rate now standing at a juicy 4.00%. In fact, the RBA is the only major central who has raised rates, hiking them up by 100 basis points from its 2009 lows.

While some expect Governor Glenn Stevens and his mates to hike rates further, there are some rumors circulating around the Tasman Sea saying that they could take a breather this time around. I wouldn’t really put it past them either… Just this February, the RBA hit the brakes on their hikes, waiting an additional month before increasing rates again in March. With that said, will the RBA take a “wait-and-see approach” once again?

Let’s take a look at recent data to gauge where the RBA be leaning towards…

There have been a lot of signs that the RBA could go for another 25 point basis hike. For one, Glenn Stevens dished out some pretty hawkish statements in a recent TV interview last week. In the interview, Stevens expressed his disagreement towards low rates, saying that keeping the benchmark interest rate low for long periods does not really help anybody. Hey, if the head says so… then it must be so!

Secondly, the labor market has been steadily improving. The latest employment change report, despite falling below forecast, revealed that 4,000 jobs were added, which marked the fifth consecutive month of increase. Unemployment now stands at 5.3%, a significant improvement from the 5.8% rate seen last November.

But if there’s one reason that could force the RBA to hit the pause button, it is the current state of Australia’s housing market. Last week, the Land Down Under’s building approvals report sank down under, printing a surprise 3.3% decline for February instead of the expected 2.1% rise. Remember, building approvals already fell by 5.5% in January as higher borrowing rates pushed mortgage costs up, dampening demand for new homes.

Australian retail sales also tumbled by a surprising 1.4% in February, as the central bank’s rate hikes prompted Australians to cut back on spending. After all, higher interest rates mean higher returns on savings, making it more enticing to save than to splurge.

So, Mr. Stevens, what will be? Aye or nay? More importantly, what could this mean for currency traders?

If the RBA surprises the market by not raising rates, then it’s likely that the Aussie will take a hit. Looking back at February when the RBA unexpectedly paused on a rate hike, the Aussie sunk by more than a hundred pips against the yen and the greenback after the release of the statement. Who knows? The same could happen again!

On the other hand, two scenarios can occur if the bank hikes its rate at least as projected. One is that there may not be much effect on the Aussie’s price action since the bank’s decision may already be priced in by the market. The other set-up is that traders could also sell the Aussie on news especially now that conditions indicate that the Aussie is at extreme overbought levels.

We all know that a rate hike could curb the country’s inflation by dampening consumption. The question now is, does the economy really merit such action? Some say it does, some say it doesn’t. But what would matter come rate decision time is what the RBA heads think. Stay tuned tomorrow at 4:30 am GMT!