The Reserve Bank of Australia (RBA) is likely to maintain interest rates at their current level during tomorrow's meeting. This decision is primarily expected due to recent inflation data, which suggests a lower-than-expected price slowdown and persistent high inflation.
It's worth noting that inflation for the second quarter accelerated to 3.8% year-on-year from 3.6%, although this was in line with market expectations. Inflation in the first quarter also fell less than expected to the aforementioned 3.6% from the anticipated 3.4%. On a quarterly basis, we saw a 1.0% increase, which was in line with expectations. On the other hand, underlying inflation showed improvement: it decreased to 3.9% year-on-year from 4.0%, while on a quarterly basis it grew by 0.8% compared to the expected 1.0%.
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- It is expected that the RBA may maintain a relatively hawkish stance, given the still heated inflation. Some even suggest the possibility of signaling potential rate hikes.
- On the other hand, inflation is not surprising with significantly higher readings. PMI indices point to a possible slowdown in the economy, and mixed data from China does not suggest that there will be increased pressure for prices to rebound in Australia.
- The RBA will most likely reiterate that inflation is too high. RBA Governor Michelle Bullock will likely emphasize the need to maintain restrictive interest rate levels.
- The decline in underlying inflation, which is closely watched by the RBA, maintains market expectations for cuts this year. However, a full cut is only priced in for November.
- However, a surprise cannot be ruled out, given the recessionary signals from around the world. At the same time, the Australian job market remains strong. From April to June, there was a significant increase in employment and stabilization of the unemployment rate at 4.1% (although this is the highest level since January 2022).
- Recent inflation projections suggest that inflation may fall to the 2-3% target range by the end of the year and reach half of this range in 2025/2026. The RBA also assumes that interest rates will remain near current levels until the end of this year.
The market is pricing in the first-rate cut only in November. However, given the global turmoil, it cannot be ruled out that the timing of the first cut will move forward to September. If such suggestions were made by Bullock, then the AUD could come under stronger selling pressure, although we are currently seeing a strong selling pressure on AUDUSD. Source: Bloomberg Finance LP, XTB.
How will the market react?
The Australian dollar is highly susceptible to recessionary factors, as Australia is a major commodity exporter. Moreover, the AUD is one of the high-yielding currencies, so unwinding the carry trade involving the yen also negatively impacts the AUD. It is worth noting, that the AUD is currently losing strength more than the NZD. However, if the RBA remains hawkish and does not communicate the possibility of accelerating rate cuts, then a revival in AUDNZD cannot be ruled out (the AUDUSD pair has already rebounded from the lowest level since November 2023 and April 2024). Currently, AUDNZD is testing the range of the previous large correction in the uptrend. Roughly half of the previous consolidation range between 1.05 and 1.105 assumes support around the 1.0780 level, which is slightly below the 61.8 Fibonacci retracement.
Source: xStation5
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