Reserve Bank of Australia meeting preview: no policy change expected as Aussie yields surge

The economic data that matters:

What is the market expecting from this RBA meeting?

Little by way of policy change is expected from the RBA at its March meeting. After announcing a surprise extension to its quantitative easing program, and reinforcing its outlook for the Australian economy as well as its forward guidance at the February meeting, the RBA has provided a clear road map for policy into the short and medium-term. Nevertheless, with bond market volatility undermining some of the central bank’s policy operations, the Australian Dollar trending higher, and the market’s second-guessing the path for interest rates, the markets will be following what the RBA may say or do to maintain the markets' confidence in its policy stance.

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

What’s the RBA’s view on and approach to bond market volatility?

The headline issue in global markets overhanging this RBA meeting is the recent volatility in bond markets. As confidence grows about the global economic outlook, and as fiscal authorities keep pumping money into the global economy, bond yields have spiked, destabilizing markets and undermining central bankers’ attempts to keep rates low, with the volatility forcing the RBA to intervene in bond markets last week to protect the target on the 3-year government bond. Market participants will be assessing what the RBA says about action in the bond market, and whether it hints at any greater intervention in it in the future to keep yields pegged.

Will the RBA do more to put downward pressure on the Australian Dollar?

Although it’s pulled back off the back of recent market volatility, the Australian Dollar remains in a broad uptrend, thanks to generally bullish market sentiment, surging commodity prices, a soft US Dollar and higher Australian bond yields. Despite the RBA’s efforts in implementing its quantitative easing program, which the RBA has implored has lowered bond yields and the Australian Dollar, the AUD/USD, in particular, continues to push to levels that threaten to undermine the central bank’s policy objectives. Talk of any further measures to put downward pressure on the exchange rate will be looked out for by market participants at this meeting, especially as the RBA comes under sustained criticism that it ought to be doing more quantitative easing to combat a stronger currency.

Will the RBA push back against market expectations of rate hikes?

As growth and inflation expectations have picked-up across the globe, traders have increasingly priced in the possibility that central banks will normalize policy quicker than the institutions themselves are guiding. The RBA is currently no exception, with interest rate markets implying that it may begin to hike interest rates as soon as April 2022 – well before the year 2024 the RBA is currently guiding. With the RBA likely to its best to keep policy sufficiently accommodative to support Australia’s economic recovery, market participants will be sensitive to any language that may push back against market expectations, or potentially affirm it.

How could the RBA meeting impact the AUD/USD?

Volatility in global financial markets has put the AUD/USD in an interesting spot leading into the RBA’s meeting. On the one hand, fundamentals are highly supportive of a stronger /AUDUSD, as commodities surge, yield spreads widen and the RBA falls behind in expanding its balance sheet, while technically, the trend remains to the upside overall. However, in the short-term, after the AUD/USD’s brief foray above 0.8000 last week, its precipitous plunge following that milestone has the pair at a crossroads. The daily RSI had crossed 50 and is trending to the downside, with price testing the trendline that’s supported it higher since the March 20202 lows and the 50-day MA. A break below these levels would suggest a broader retracement could be afoot for the AUD/USD towards the mid-70s. While if it holds, it would be another bullish indicator of a pair still poised to trend higher.