Partner Center Find a Broker

Most analysts don’t believe the Reserve Bank of Australia (RBA) will deliver a rate hike on Tuesday, but there’s also a good number that think otherwise. The economy has shown both bright and dark spots since the RBA last made a statement, so a case can certainly be made for both views.

Forecast in favor of doves

Indeed, over the last 30 days, Australia has seen its fair share of bad data. Retail sales dropped 0.5% and home loans slid 1.5% in the month of March, while April saw the number of unemployed grow by 22,100.

To make matters worse, these figures were later on dwarfed by the 1.2% contraction of Q1 2011’s GDP, which is even worse than the 1.1% decline that most had forecasted. With numbers like that, it ain’t surprising that majority of market geeks believe rates will stay at 4.75%!

Potential for an upside surprise

They may be outnumbered, but about a third of analysts still believe that the RBA will hike rates on Tuesday. After all, the RBA’s upgraded inflation forecast, a strong rebound in exports, and awesome private capital expenditures in the first quarter of the year make a solid case for a rate hike, don’t you think?

The huge jump in exports that March delivered is definitely nothing to be ignored, especially since exports was supposed to be the most affected by the floods. I mean, who wouldn’t expect lousy numbers? With many of Australia’s mines flooded, Australia had difficulty producing its top exports – coal and gold (or black and yellow as I like to call ’em).

Needless to say, everyone’s jaws dropped to the floor when they saw that exports surged 9% in March. And though exports growth tempered to 1% in April, it’s widely believed that the industry is still recovering and is even gaining steam.

More importantly, the surprising 3.4% increase in business investments, as measured by private capital expenditures, could result in booming growth down the line. This, I believe, is what really has a shot at turning the RBA’s decision in favor of the hawks.

Many say that the RBA’s decision will be based more on what will happen rather than what has happened. If that’s the case, then the RBA end up reevaluating its growth forecasts, which could lead it to tighten its monetary policy sooner rather than later. After all, if companies are investing more than expected now, then it could lead to stronger-than-expected growth later on.

Trading AUD/USD

I’m not saying that we should bet the farm on a rate hike taking place. Y’all should never bet the farm in the first place! All I’m saying is stay flexible. Yes, there’s only a slim chance of it happening (about as slim a chance Cyclopip has with the ladies), but if the RBA does push through with a rate hike, it could result in a massive move on AUD/USD.

AUD/USD 1-hour chart

Just take a look at how the market reacted when the RBA delivered a surprise back in November. Forecasts had the benchmark interest rate at 4.50%, but the RBA caught everyone off guard and decided to pump rates up to 4.75%! As a result, this bad boy shot up over 100 pips within an hour, and the bullishness was sustained throughout the week.

If the RBA pulls a similar stunt this Tuesday, I wouldn’t be surprised to see the same thing happen. That being the case, it might be wise to set a buy stop or two above market price right before the RBA makes its decision. You don’t wanna miss out on a big move like that, do you? So y’all better bring you’re A-game and be alert on Tuesday at 4:30 am GMT ’cause things could get crazy!