RBA Preview: what to expect from this month’s RBA meeting

The economic data that matters:

What are the key themes to watch out this RBA meeting?

An update on the outlook for the Australian economy

Given the fluid nature of the Covid-19 shut down, and it’s difficult to predict impact on the Australian economy, market participants will be keenly awaiting the RBA’s latest commentary on Australian economic fundamentals. In a recent speech, RBA Governor Lowe stated in his approximation that the country’s GDP could fall by 10% in the June quarter, with the jobless rate spiking by 10% by the end of it, too. As the Australian economy looks on the cusp of a gradual reopening, the markets will search for potential scenario analyses from the RBA as it relates to economic activity, especially considering a more comprehensive outlook from the central bank about the state of the economy will come Friday in its Statement on Monetary Policy.

Potential changes to the RBA’s policy suite

Market participants have become resigned to the fact that because joblessness and inflation are expected to remain well below the RBA’s targets for several years, the Australian cash-rate will remain wedded to 0.25% for the foreseeable future. At that, as the RBA has already flagged, the central bank’s newly implemented yield curve control program will keep the 3-year government bond yield pinned to 0.25%, too. The core of the RBA’s policy settings is unlikely to change considerably at any time in the near future. But for market participants, there will remain an interest in the possible marginal change in the RBA’s asset purchasing, which it has already begun tapering, having now absorbed roughly $50 billion worth of government assets via the program.

How could the RBA meeting impact the financial markets?

This RBA meeting will be important from the perspective of ascertaining a better view on the likely strength of Australian economy fundamentals going forward, along with obtaining a sense of the RBA’s ability and willingness to provide further policy support in the future if it were to be required. The overnight interest rate swaps are possibly implying that the RBA could potentially implement a “partial” interest rate cut at this meeting, or at a meeting in the future, with the market ostensibly suggesting an approximately 60% chance of a cut to interest rate on Tuesday. The ASX and AUD alike, however, maybe most sensitive to what the RBA signals about its asset purchasing program, given the tendency for the 10-year government bond yield to swing off the back of such signaling.

AUD/USD

The RBA has arguably been a tailwind for the Australian Dollar in recent times. Given the central banks' reluctance to embark on a traditional QE program, that in anyway rivals that which has been implemented by the US Federal Reserve, a widening yield advantage for long-dated Australian government bonds over US government bonds has supported a recent push higher in the AUD/USD. Of course, the factor driving the Australian Dollar more than any is its function as a global growth-and-risk proxy. As uncertainty reigns about the outlook for the global economy, exacerbated by renewed trade tensions between the US and China, the AUD/USD has fallen from its recent highs, as the currency threatens to begin a new foray lower in the short-term.

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