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

The economic data that matters:

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

What’s the outlook for the Australian economy?

This RBA meeting will come a day before the release of Australian GDP for the June quarter. It’s expected to reveal the Australian economy contracted by -6.2% on a year-over-year basis, marking its first technical recession in 29-years. Though it’s expected that the worst of the downturn has passed, there will be significant interest in what the RBA says at this meeting about Australia’s economic outlook. Following Victoria’s recent lockdowns, market economists have revised lower their expectations for growth in the September quarter, with the risk growing that the Australian economy could record three-successive quarters of negative growth.

Is the RBA considering adjusting its policy suite?

Given the potential of a slower than previously expected recovery for the Australian economy, which the RBA has acknowledged itself, the market will be searching for hints from the RBA this week it’s considering increasing monetary policy support. For the first time since the RBA rolled out its emergency policy measures in March, the central bank acknowledged in its most recent Statement of Monetary Policy it “has not ruled out adjusting [the stimulus] package if circumstances warranted”. The markets will be looking for a qualification of this comment at this month’s RBA meeting, as well as clues as to what such adjustments may be.

How could the RBA meeting impact the financial markets?

The market’s reaction to this RBA meeting will depend on whether the RBA flags possible adjustments to its policy settings. The RBA has remained relatively conservative in its approach to the policy since the beginning of the virus-crisis, instead emphasizing the role of government in driving Australia’s economic recovery. A recognition from the RBA that it might need to do more, most likely via rolling-out its yield curve program further along the yield curve, or perhaps via a more traditional quantitative easing program, would be a bullish signal to the market. Such an event would see long-term rates decline, the ASX probably experience a boost, and the AUD/USD pullback, in the short-term.

AUD/USD

The AUD/USD has traded less according to Australian economic fundamentals recently, and more according to sentiment in global financial markets, and the fortunes of the US Dollar. The AUD/USD hit a fresh 18-month high last week, as the US Dollar extended its recent trend lower, and as improving market sentiment drove a broad-based climb in risk assets. Perhaps no matter what the RBA outlines at this meeting, the AUD/USD will remain driven by these factors. If the RBA strikes a very dovish tone, a pullback in the AUD/USD to support/resistance to around 0.7280 will be watched. If not, the pair will be given room to continue its recent rally, with the next key level around 0.7390.