Reserve Bank of Australia meeting preview: no big changes expected for final meeting of 2020

The economic data that matters:

What is the market expecting from this RBA meeting?

From a policy perspective, little new is expected to emerge from the RBA at this meeting. In what will be the final meeting for the central bank for 2020, the board is likely to focus on providing something of a stock-take view on policy settings, at the end of a year which has seen interest rates cut three times, and a raft of unconventional monetary policy measures, including a quantitative easing program, implemented. There’ll also be a secondary focus on what update the RBA can provide about the economic outlook, with Australia’s September quarter GDP figures scheduled for release a day after the meeting.

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

What’s the RBA’s current outlook for economic growth?

The economy has outperformed the RBA’s expectations throughout the pandemic. With the Australian economy weathering the pandemic well, but global growth still at risk for an uncertain macroeconomic backdrop, market participants will be watching closely what the RBA says about Australia’s path to recovery. In its latest Statement on Monetary Policy, released last month, the RBA now thinks that GDP growth will be -4% and the unemployment rate 8% for the year ending 2020, which is up from -6% and 10% earlier in the pandemic. The latest national accounts will be released a day after this month’s RBA meeting, with a consensus forecast suggesting GDP growth was 2.4% in the September quarter.

How big a problem is the rising Australian Dollar?

The major reason for the RBA rolling out another round of stimulus, including its quantitative easing program, in November were concerns about the appreciation in the Australian Dollar. The AUD/USD has climbed considerably this year, and currently trades close to its year-to-date highs, as a depreciating greenback, and strong risk-appetite in global financial markets, bids up the currency. The exchange rate is clearly a risk to Australia’s economic recovery, with the RBA stating its willingness to alter policy on the basis of changing dynamics in currency markets. Given this, market participants will be keeping a keen eye on any mention from the RBA about the currency at this meeting.

What’s the RBA’s appetite for further policy tweaks?

Although no change to policy settings is expected at this meeting, the RBA has sought to reassure the markets that it is “prepared to do more if necessary”. It’s judged that this means the RBA will increase the size and scale of its quantitative program if required, to support the Australian economy through the Covid-19 recession. Although it's unlikely to make direct comment on the subject, any information about the RBA’s willingness to cut rates into negative territory will be searched for, after RBA Governor Lowe stated in a speech last month such a policy might be implemented if other central banks made such a move.

How could the RBA meeting impact the AUD/USD?

If recent trends are any guide, the AUD/USD may react very little in the bigger picture to what the RBA says or does. Despite embarking on a quantitative easing program expressly because of a rising Australian Dollar, the AUD/USD has continued to appreciate, trading towards the year-to-date highs and price resistance at 0.7414. The pair is trading in a strong correlation with the S&P 500, with little indication that the trend will change in the longer term. Hence, if global market sentiment remains buoyant, a rally through price resistance at 0.7414 in the near term for the AUD/USD opens up a rally towards 0.7500 into the end of the year, with key price support residing around 0.7350 for the time being.