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 new and what more can the RBA do?

The RBA has taken a relatively conservative line on policy since rolling out its massive monetary support program in March. While promising in recent communications to the market it will maintain stimulus for “as long as required”, the RBA has been reticent about what further policy support it may provide, beyond increasing its asset purchasing program “if necessary”. Though it’s not expected to be forthcoming, market participants will be sensitive to clues from the RBA out of this month’s meeting about the potential for deeper and broader monetary stimulus, especially in the event of a deterioration in financial conditions and, or economic fundamentals.

What's the outlook for the Australian economy as it approaches September's stimulus "cliff"?

The RBA has adopted a generally upbeat, albeit cautious tone in its recent commentary about Australia’s economic recovery. Citing in the past that the severity of the economic downturn could be “less than earlier expected”, owing to lower than expected Covid-19 infections in Australia and a subsequently quicker re-opening of the economy. Market participants will be on the lookout for a fresh update from the RBA on what shape the economy’s recovery may take. A particular focus will be on any allusion the RBA makes to what additional or supplementary support the economy may need from the fiscal side in the near future, as Australia approaches September’s so-called “fiscal cliff”.

How might a second-wave of Covid-19 infections impact the economic recovery?

Given how contingent Australia’s economic recovery is on the Covid-19 pandemic, a high-degree of interest from market participants at this RBA meeting will be in any commentary on the potential for a “second-wave” of Covid-19 infections - both domestically and abroad. Volatility in global markets increased in June, as a pick-up in Covid-19 infection rates, especially in the US, cast doubt over the global economic recovery, with a new outbreak of Covid-19 infections in Victoria also undermining market sentiment domestically. Any revision from the RBA on its outlook for the economy because of a potential new peak in Covid-19 infections may prompt a re-pricing of risk in financial markets.

How could the RBA meeting impact the financial markets?

The RBA has done relatively little to disturb financial markets in recent months, and there’s the expectation that this meeting may deliver the same outcome. The central bank’s conservative and consistent policy settings and guidance has meant that the Australian Dollar and Australian asset markets have traded in-line with other broader themes, rather than the RBA policy. If it were to occur, a more downbeat assessment on the Australian economy from the RBA would likely weigh on the Australian Dollar and Australian sovereign bond yields. While any possible clue on a greater stimulus and expanded policy support would likely boost risk-assets, and would also likely weigh on the Australian Dollar and bond yields.

AUD/USD

The AUD/USD has traded according to the broader “risk-on/risk-off” dynamic that’s driven global markets since the beginning of the Covid-19 crisis. The AUD/USD has been highly correlated to S&P500 Futures, as has most growth/risk-sensitive assets. Despite retracing after recording a fresh 10-month high in June, the AUD/USD remains in a short-term uptrend, breaking-out recently from a period of price consolidation. Key resistance for the AUD/USD exists at its recent “higher-high” now at around 0.7080. Conversely, the AUD/USD’s 20-day EMA appears to be in a solid level of price support currently, which if broken opens up downside to a confluence of key support levels at 0.6660/70.