RBA preview: Four questions ahead of this month’s RBA meeting

The economic data that matters:

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What is the market expecting from this RBA meeting?

This meeting will centre around what the RBA intends to do, or perhaps not to do, in response to Australia’s growing Covid-19 outbreak. With the country’s two largest state economies in New South Wales and Victoria in strict lockdowns as cases in both escalate, there’s the growing consensus of a severe contraction in GDP this quarter, and the increased likelihood of a double dip recession for the economy. Naturally given that the cash rate is at the effective lower bound, no changes to rates will occur at this meeting, with traders also pushing back expectations of rate hikes from the RBA in the future to early 2023. Instead, the core question for this RBA meeting will be whether the central bank reverses its decision to begin tapering its QE program, in response to the unfolding situation.

Will the RBA back flip on its tapering plans?

It’s widely expected the RBA will be forced into reversing its plans to taper its bond buying in response to the worsening economic situation in Australia. Despite this, there is lingering doubts over whether the RBA will pull the trigger on the decision, having disappointed the markets last month by sticking to its plan to reduce monthly bond purchases to $4 billion from $5 billion from this month.

The RBA’s justification for not stepping away from the tapering timeline, it outlined at its July meeting, was its expectation that there will be sufficient pent up demand to drive a strong recovery in the Australian economy as lockdowns ease, and that fiscal policy is better equipped to deal with such demand shocks. There is building pressure on the RBA however to be “seen to be doing something”, with many tipping the change in stance on the basis of a symbolic move to boost confidence.

What’s the outlook for the Australian economy as the vaccine drive ramps-up?

The RBA released its Statement on Monetary Policy last month, which provided an updated set of economic projections that took into account the impacts of recent lockdowns across Australia. The central bank only downgraded its growth forecasts for the year ending to December 2021 to 4% from a previous 4.75%, with the unemployment rate forecast unchanged and still trending lower, and CPI growth actually forecast to increase. There will be interest in what the RBA says about economy activity going forward, especially in the context of a move away from Covid--zero policy setting in Australia, and one that is geared towards a reopening based on states reaching 70% or 80% vaccine thresholds, as the country’s vaccine drives gathers pace and brings closer an easing of restrictions.

How could the RBA meeting impact the AUD/USD?

Given this meeting is considered “live” for a policy change, there’s a high probability of movement in the AUD/USD when the RBA hands down its decision tomorrow. Although there are arguably bigger factors driving the AUD/USD right now, chiefly amongst them shifting market sentiment in global markets, and more importantly, a recent weakening in the US Dollar as traders price-in a less hasty path for tapering by the US Federal Reserve, the RBA’s bond buying will also impact how the pair trades in the short to medium term.

Should the RBA decide to reverse its tapering plans, that ought to put some downward pressure on the AUD/USD, with previous resistance now support around 0.7420 the crucial level on the downside. If the RBA’s sticks to its guns and moves forward with tapering this month, that may give extra upside impetus for the pair, with 100-day MA at 0.7440 and technical resistance at 0.7460 two key levels to watch.

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