Central bank announcements might rock the forex market again this week, with the Reserve Bank of Australia (RBA) ready to get the ball rolling tomorrow (Nov. 3, 4:30 am GMT). If you’re planning on trading this top-tier event, make sure you check out my Forex Trading Guide first:
Why is this event important?
If you’ve been a good student in our School of Pipsology, you’d remember that monetary policy decisions are typically the bread and butter of forex price action, as any adjustments in interest rates or liquidity have a strong impact on currency demand and value.
Policymakers base these changes mostly on inflation data since the central bank’s mandate is to maintain price stability.
To be specific, weak inflation or falling price levels could result in monetary policy easing or interest rate cuts while strong inflation could lead to tightening or rate hikes.
Other economic factors that also influence central bank decisions are overall economic growth, employment trends, and trade activity.
What happened last time?
RBA Governor Glenn Stevens and his gang of policymakers have been maintaining an accommodative stance for the most part of the year, as the weak global inflationary environment and the slowdown in China have dealt a double-whammy to the Australian economy.
The Australian bank has already cut interest rates twice earlier on then kept the door open for further easing in the months that followed.Although most of their policy statements seemed to be rehashed from the earlier ones, their October announcement put more focus on the country’s booming housing market.
The central bank acknowledged that low borrowing costs were able to support credit growth but that regulatory measures are being put in place to keep risks contained.
What’s expected this time?
Forex markets seem to be divided on their forecasts for the upcoming RBA statement, as some predict that policymakers are likely to sit on their hands for the rest of the year while others believe that a rate cut might be announced for these reasons:
- Weak Q3 inflation report (0.5% vs. 0.7% consensus)
- Weak Q3 import prices data (1.4% vs. 1.6% consensus)
- Downturn in hiring for September (-5.1K vs. +18.1K previous)
- Increased mortgage costs from top Australian banks
Keep in mind that one factor that’s preventing the RBA from lowering rates any further is the potential housing bubble that might form if borrowing costs drop once more.
After all, investors might scramble to take advantage of cheaper mortgage rates to buy more property, thereby driving demand and house prices higher.
But now that the big banks like Westpac, National Australia Bank, and Commonwealth Bank of Australia have decided to raise mortgage rates to curb demand, the RBA might actually have enough room to ease.
How might AUD/USD react?
So far, the Australian dollar is able to stay afloat against its forex peers, thanks to a few upbeat reports from its trade BFF China hinting that the economy may have already bottomed out.
If these are enough to convince RBA policymakers to refrain from cutting rates, the Aussie might enjoy a strong relief rally.Reassuring remarks from head honcho Stevens could allow the Aussie to hold on to its lead against its peers whose central banks are likely to ease further.
On the other hand, an actual interest rate cut could push the Australian currency down, especially against its forex rivals whose central banks are moving closer towards tightening.
In particular, the Fed and the Bank of England (BOE) seem to be enjoying their stay in the hawkish camp, which suggests that the Aussie might chalk up huge losses to the U.S. dollar and British pound if the RBA decides to lower interest rates.
Better review my latest Monthly Roundup on the Australian Economy to gauge if the RBA is likely to announce a rate cut this week!