Summary:
- The RBA meeting will be the most important event of upcoming hours
- No changes in monetary policy are expected
- The currency could give up part of its losses if the RBA includes its rise in the statement
The Australian central bank meets overnight and while no changes in monetary policy are expected, the event could have a significant impact on the Australia currency. The latest minutes from July’s meeting caused quite a rally on the AUDUSD that pushed the cross to multi-year highs. What could we expect from the RBA now?
Let’s begin with what the market is expecting. The conesus is that we won’t see a rate rise in Australia. What’s important, the interest rates market also sees no chances of a move before the year’s end which is…quite a positive thing for the Australian dollar. Why? Because the central bank has a low bar to surprise the market. Any hawkish signals could lead to re-pricing on ths particular market, thus leading to another leg higher on the AUDUSD.
The market sees a tiny chance of a rate rise this year. In fact, the first rate hike is not expected until 2019. source: Bloomberg
But is it a time for the RBA to become more hawkish? Looking at the labour market the answer should be “yes”. Employment rise is healthy and stable, driven mainly by a rise in full-time employment. In addition, the unemployment rate fell to lowest in three years, which means that it’s at the lowest level since the RBA started its easing cycle. Also other data started to improve. Inflation has rebounded over last few quarters, the GDP growth is stable with PMIs poitning to a continuation of the positive trend. From this point of view, the message should be hawkish.
A healthy employment growth is something that the RBA should be happy about. source: XTB, Macrobond
However, there’s also the other side of the goin. Let’s get back to the employment data. While its rise is healthy and stable, the same can’t be said about wages. As we can see on the chart below, the upward trend in salaries has halted. The rise in wages is rather muted, which is a worrying sign for the RBA. While inflation could occur, it will be probably driven by the supply side, not by consumers. That is something that the central bank should be aware of and what should limit its hawkishness.
A decline in real wages could limit RBA’s hawkishness. source: XTB, Macrobond
What could it mean for the Australian dollar? The RBA’s statement should acknowledge a healthy labor market as well as an expansion of the domestic economy. Meanhwile, it could also point to a rise in commodities prices that partly lies behind a recent rally of the AUD. As we can see, the correlation between the commodity index and the currency points that the latter is close to its fair value. There’s also a risk that the RBA could be scared by a rise of the Australian dollar. If such view is included in the statement, expect the AUD to fall. That’s probably the biggest risk heading into the central bank’s meeting for AUD bulls.
A rally of the Iron Ore and other commodities is also a reason of the AUD rally. source: XTB, Bloomberg
The correvtive move that pushed the AUDUSD back below 0.8000 could be an opportunity to join the bullish trend. However, under a certain condition. If the RBA doesn’t care about the currency and does not include it in its statement (but sounds upbeat on the economyc), watch out for a test of a resistance at 0.8050. On the other hand, if it does worry about a rise of the AUD, the cross could fall towards 0.7830, an important level of support. In fact there’s only a minor chance that the Reserve Bank of Australia will reverse the trend on the AUD and any correction should be used to join the bullish trend. To conclude – the statement should acknowledge an improvement in data and if doesn’t include anything on the AUD strength, the currency could continue its rally. But if it does, the correction of the sharp rise should occur.
AUDUSD could fall towards 0.7830 if the RBA includes a rise of the currency in its statement.