Can you believe we’re about to end another trading month this week?
And starting a new trading month usually means that the RBA is publishing its latest monetary policy decisions.
What are markets expecting this time?
Event in Focus:
Reserve Bank of Australia (RBA) Monetary Policy Statement
When Will it Be Released:
August 1, 2023 (Tuesday): 4:30 am GMT
Use our Forex Market Hours tool to convert GMT to your local time zone.
Expectations:
RBA to keep its interest rates steady at 4.10% for a third month in a row in August
RBA’s statement may emphasize the need for further tightening under the appropriate conditions
Relevant Australian Data Since the Last RBA Statement:
🟢 Arguments for Tighter Monetary Policy / Bullish AUD
Australia added net 32.6K jobs in June vs. 15K expected, 76.6K previous.
The unemployment rate dipped from 3.6% to 3.5% as the participation rate edged 0.1% lower to 66.8%
Retail sales were up by another 0.7% in May (vs. 0.7% expected and previous) as consumers take advantage of promotions and sales events
🔴 Arguments for Looser Monetary Policy / Bearish AUD
RBA’s Cash Rate is up from 0.35% in May 2022 to 4.10% today
Flash manufacturing PMI improved from 48.2 to 49.1 while services PMI fell from 50.3 to 48.0 in July
Headline CPI slowed from 1.4% q/q to 0.8% vs. 1.0% expected, annual reading down from 5.6% to 5.4% as expected
Australia’s quarterly NAB survey showed business conditions dropping 8 pts to +9 as businesses “moderated considerably” in Q2
Westpac consumer sentiment index climbed from 0.2% to 2.7% in July to signal strong improvement in optimism
Melbourne Institute inflation gauge slowed down from 0.9% to 0.1% in May
Previous Releases and Risk Environment Influence on AUD
Jul. 4, 2023
Action/results: The RBA kept its interest rates steady at 4.10%, disappointing those who had priced in another rate hike.
In its statement, RBA mentioned that inflation has “passed its peak” but that “some further tightening” may still be required. Its meeting minutes also hinted that members are willing to revisit the rate hike move at the August meeting.
AUD, which had been ranging near its U.S. session levels, dropped to its Monday lows but the “hawkish pause” and a lack of decisive sentiment trend enabled the comdoll to recover all of its post-event losses by the end of the day.
Risk environment and Intermarket behaviors: Russia and Saudi Arabia surprised the markets with additional output cuts as well as weaker-than-expected PMI reports from the U.S. and China inspired a bit of risk aversion on Monday.
With not a lot of fresh catalysts and with the U.S. markets out on Tuesday, it was easy for sellers to take profits during the RBA’s “hawkish pause” and continue pricing in a dovish U.S. core PCE price index miss from the previous week.
Jun. 6, 2023
Action/results: Instead of keeping its interest rates steady at 3.85%, the RBA shocked the markets with a 25bps rate hike to 4.10%.
In addition to that, the official statement also shared that “further tightening of monetary policy may be required.”
Not surprisingly, AUD spiked broadly on the news. It also helped the commodity-related currency that traders were optimistic on speculation that Chinese regulators could possibly soon provide support to the housing sector.
The RBA’s hawkish rate hike pushed the Aussie to new intraday highs and stayed within the areas until the next day’s Asian session trading.
Risk environment and Intermarket behaviors: Traders started the week on an optimistic note thanks to a resolution to the U.S. debt ceiling drama over the weekend, a strong NFP release on Friday, and a surprise output cut by OPEC+.
Speculations that the Chinese government would prop up its shaky housing sector also helped push equities and “risk” assets like crude oil, AUD, NZD, CAD, and GBP higher even before the RBA dropped its decision.
Price action probabilities
Risk sentiment probabilities: Risk sentiment seems to be in a risk-off lean as we start the week as bond yields, equities and crypto are dancing in the red during the U.S. trading session.
That may hold during the RBA monetary policy statement, most likely if the Caixin Chinese manufacturing PMI update shows a dip lower (current expectations are for a 50.1 neutral sentiment read, below 50.5 previous) and/or contractionary conditions.
Of course, if they print an improvement from the previous month read, broad risk sentiment may get more positive on the session. But with expectations pretty close to previous reads, unless we see a big divergence, bias and volatility may stay muted as the market has likely already priced in this data having seen the governments numbers at the week open.
Australian Dollar scenarios
Base case: Based on the official CPI and other leading indicators above, Governor Lowe and his gang will have room to keep their policies steady at 4.10% for another month in August.
But RBA officials probably won’t want to signal the end of rate hikes, so they’ll likely keep it hawkish like in July.
Like in the June and July decisions, RBA’s August event will happen on a Tuesday. So, depending on the overall risk sentiment on Monday, AUD’s price reaction to the RBA’s rate hike could make or break an uptrend for that week.
Unless we see strong trends, it’s also likely that AUD will see profit-taking before the start of the European session.
In the case of a risk-off trading environment, a hawkish pause could push AUD higher against JPY, NZD, and USD.
Alternative Scenario 1: Though they’ll probably only have a strong labour market to point to, the RBA gang could surprise the markets with another 25 bps rate hike to underscore their commitment to bringing down inflation.
If the RBA raises its interest rates by 25 basis points, this surprise scenario would likely push AUD higher across the board but may move more strongly against NZD, USD, and GBP.
Alternative Scenario 2: If the RBA announces a rate hike pause AND a plan to keep the next rate decisions data-dependent, then AUD could dip against its major counterparts.
AUD may weaken against more currencies with more hawkish central banks like GBP and EUR as well as its usual counterparts like NZD, USD, and JPY.
