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 will happen with the interest rate policy and the policy outlook?

The RBA has taken a conservative stance on the monetary policy after implementing its emergency policy setting in March. Market participants are tipping it will be more of the same from the RBA at this month’s meeting. The cash rate ought to remain at 0.25%, and the yield curve control program is expected to remain largely untouched, with the 3-Year Australian Government Bond yield to stay fixed at 0.25%. As-a-result, traders will be looking for what forward guidance the RBA may deliver this month about future policy arrangements. On top of that, the market will be watching for whether the RBA sees room to further expand its asset purchasing program, especially in light of the recent lift in long-term yields, and the appreciation of the AUD/USD.

How is the economy tracking compared to forecasts?

The RBA provided several forecasts for the economy in its Statement on Monetary Policy last month, based on best, worst and baseline scenarios for the COVID-19 crisis. The RBA’s baseline forecast was based on the assumption that lockdown measures in Australian would persist largely until September, with the impact being a contraction in GDP in the second quarter of 10%, and an unemployment rate that tops out at 10% in June. Thus far, the Australian economy has begun re-opening quicker than the RBA’s base-case. Market participants will be watching the RBA’s policy statement on Thursday afternoon for insight as to whether the central bank expects a quicker improvement in economic conditions as-a-result of the quicker return to normal.

What future policy support might the Australian economy need?

As the Australian economy moves towards reopening, the focus has increasingly turned to the path out of the COVID-19 crisis. In particular, policy interest has turned to what economic authorities are willing and able to do to support the Australian economy after September, when a series of economic stimulus measures and tools of economic support expires. The RBA has recently pushed the onus back on the Australian Government to do more from a fiscal and regulatory standpoint to manage this transition. Though the RBA has proven its reluctance to become any more aggressive in its policymaking, market participants will be perusing the RBA’s policy statement for signs that the central bank will step into the policy-void and provide greater monetary policy stimulus to the economy, if necessary.

How could the RBA meeting impact the financial markets?

The impact of this RBA meeting on financial markets might well be subtle. The RBA’s policymaking and rhetoric have caused little lasting disruption to the market in recent months, as the central bank remains committed to managing and monitoring the impacts of the policy suite it rolled out in March. One asset class that has proven somewhat sensitive to RBA news in the recently is the Australian government bond market. Yields at the back end of the yield-curve have often moved higher after RBA meetings and RBA board member speeches, largely as the RBA takes a cautious approach to its asset purchasing program. If the dynamic is replicated this week, look for a possible patch of softness in the ASX200 and strength in the AUD/USD on the back of a modest pick-up in bond yields.

AUD/USD

The AUD/USD has appreciated considerably since the lows it recorded in March, proving an outperformer amongst G10 currencies. The cause of this stronger Australian Dollar is two-fold. Firstly, the AUD has benefitted from the uplift in risk-appetite, as market participants price-in a quicker than feared recovery for the global economy from the COVID-19 crisis. Secondly, from a policy divergence between the RBA and the US Federal Reserve, whereby the Fed has been far more aggressive in its asset purchasing program than the RBA. The AUD/USD is now trading close to a 3-month high as it currently stands. Although it appears close to overbought territory, with a recent break of the pair’s 200-day EMA, as well as the 67-handle, the short-term trend for the AUD/USD looks skewed to the upside.