RBA meeting preview: no changes tipped, but focus to remain on economic outlook and policy guidance

The economic data that matters:

What is the market expecting from this RBA meeting?

The market isn’t expecting any major change in policy from the RBA at its first meeting for 2021. The cash rate and the three-year yield curve target rate is expected to be left at 0.1%, while the RBA’s QE program is tipped to be kept at its current size and pace. Instead, the markets will be perusing the RBA’s statement for any clues about the economic outlook and future policy direction. It’s expected the RBA will maintain its positive outlook for Australia’s economic recovery while highlighting the downside risks from an unstable global economic backdrop, and the possibility of changing policy guidance in the future.

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

How is Australia’s economic recovery faring?

Market participants will be gauging how the RBA views on Australia’s economic outlook has changed for the year ahead at this meeting. The economy’s recovery is running significantly stronger than the RBA’s most recent economic projections, and as the Australian economy remains relatively open, and the global growth outlook being boosted by the continued roll-out of vaccines and US President Joe Biden’s fiscal stimulus package, expectations are for the RBA to deliver an upbeat view on the economy. Some attention at this meeting will be directed towards some of the short-term risks to the recovery too: market participants will be looking for the RBA’s view on how the economy may fair as fiscal support from the government tapers in coming months.

Is the Australian Dollar still a factor in the RBA’s policymaking?

Arguably the primary reason for the RBA’s launch of its quantitative easing program in 2020 was to keep downward pressure on the Australian Dollar, as the currency rose off the back of improving global growth, strong market sentiment and the aggressive balance sheet expansion from other global central banks. Despite retracing some of its gains recently, the AUD/USD, and the RBA’s trade-weighted foreign exchange basket, is higher than what it was at the last RBA meeting, with the trend for the Australian Dollar still to the upside. Given the headwinds posed by a stronger currency, the market will be watching for clues from the RBA at this meeting that it may, or may not, do more with policy to keep downward pressure on the Australian Dollar.

Could the RBA normalize policy sooner than expected?

Given the Australian economy’s strong position, and building upside risks to the macroeconomic outlook in the year ahead, some commentary has emerged in the market recently suggesting the RBA may look to unwind its QE program and alter its forward guidance sooner than previously expected. As countries progressively reopen, and the trillions of dollars of stimulus flows through the global economy, there are growing concerns that the dynamic may lead to a rapid lift in inflation pressures, that may require central banks to taper monetary stimulus. Market participants will be closely watching any talk of inflationary pressures and possible normalization from the RBA, for the risk that the ultra-easy financial conditions that have sustained financial markets may be removed sooner than expected.

How could the RBA meeting impact the AUD/USD?

The RBA has had tremendous difficulty in controlling the exchange rate, with the AUD/USD still trading as a proxy for global market sentiment, as well as surging iron ore and broader commodity prices. The AUD/USD has recently retreated from its 2-and-a-half year highs above 78 cents, to be currently trading within the 0.7600 handle. Short-term risks appear skewed to the downside for the pair, as volatility in global markets and an unfolding correction in iron ore prices put downward pressure on it. Though the AUD/USD has had the tendency to rally following RBA meetings, if sentiment in markets remains risk-averse, the currency may have a further downside to probe, with a breakthrough 0.7600 potentially opening up downside into the 0.7400 handle.