G’day, forex mates! The Aussie is in most market watchers’ crosshairs this week since it has several catalysts lined up, one of which is the RBA decision. Here’s what you need to know if you’re trading this event.
Why does this event matter?
For the newbies out there, lemme give you a quick Cliff Notes version of the Reserve Bank of Australia’s monetary policy decision. You see, central banks like the RBA are tasked with maintaining price stability and are given policy tools like interest rates and money supply that they can turn up or down a notch.
When the economy is growing rapidly and price levels are rising quickly, policymakers can increase interest rates in order to keep everything in check. On the flip side, when the economy is contracting or not expanding fast enough and inflation is tanking, central bank officials can decide to lower interest rates in order to stimulate lending and spending activity.
Now interest rate changes or expectations of such are one of the biggest drivers of forex price action, so traders typically pay close attention to central bank announcements and try to spot any changes in policy biases.
What happened last time?
In the September RBA statement, Philip Lowe and his team were mostly optimistic in saying that they still expect the economy to “gradually pick up over the coming year.” However, they also pointed out that wage growth would likely stay subdued and blamed AUD strength for keeping a lid on price pressures.
The minutes of this particular meeting focused on employment, citing that hiring growth is expected to continue and possibly feed into stronger wages down the line. Still, they didn’t pass up the opportunity to jawbone a little more by saying that “further appreciation of the Australian dollar would be expected to result in a slower pick-up in growth and inflation.”
What’s expected for the October RBA statement?
The Australian central bank is widely expected to keep interest rates on hold at 1.50% once more, but that doesn’t mean that the event would be a dud.
The RBA is already one of the less cheery major central banks out there and the latest batch of economic data from Australia suggests that it might scoot further towards the dovish end of the spectrum. For one, headline CPI has fallen from 0.5% in Q1 to 0.2% in Q2 while tepid wage growth hints that inflation might not be picking up anytime soon.
While GDP growth has been more or less in line with RBA forecasts for the first half of the year, export activity for July and August has slowed and signaled lower contribution to overall performance. Now this is noteworthy for the Land Down Under as its economy relies heavily on trade.
With that, it probably won’t be surprising to see more jawboning from the RBA this week as they pin the blame for weak wages, trade activity, and inflation on Aussie strength. However, this scenario appears to have been priced in as the currency has been sliding for nearly a week and a half.
Should head honcho Lowe simply hit the Ctrl+C and Ctrl+V buttons instead of typing up new phrases or scrapping a few from the previous announcement, there’s a chance that the Aussie could still pop higher on profit-taking from earlier short positions. But if RBA policymakers step on the gas with their downbeat remarks and jawboning, the Aussie might have more room to tumble.