Just How Dovish Are The RBA?
Rowan Crosby • 2 min read
In recent months, the RBA has taken Australia’s OCR down to a record low of 1.0%. But the question still remains, just how low will rates go?
This week, we’ll get some insight into the thinking of the RBA, at least from the time of the last meeting, when we get the latest RBA minutes.
If you recall, the last meeting saw rates left unchanged. Prior to that, there had been two 25bp cuts that moved the OCR down to 1.0% from 1.5%.
At the last meeting, the talk was really that the RBA would cut rates further, ‘if needed.’ But since that point in time things have changed a little bit.
As recently as last week, the employment situation in Australia has picked up. The most recent jobs report came in strong with over 40K new jobs having been created. We know that the RBA has been target jobs as a way to lift inflation. However, while there was job growth, the metric that matters most to the RBA, the jobless rate, stayed steady at 5.2%.
We also saw some slight growth in CPI in the week prior as well. While the RBA was wanted jobs to pressure wages which would then lead to a CPI boost, it appeared that the rate cuts had jumped the gun to some extent.
So now we are left with the situation that the RBA minutes will be released, but they might very well be a touch out of date.
There is also the fact that the AUD/USD has really fallen away in recent weeks. When the US-China trade wars flared after China devalued the Yuan, risk-assets led my the Aussie dollar really got hit hard. But the weak dollar does really boost the export economy of Australia.
So what that means this week is while this is an important release, things are changing fast.
Prior to the last RBA meeting, there was a 44% chance of a 25 bp cut in September. There is now a 77% chance of no change in rates at that meeting.
So it is clear markets are starting to feel that we might be about right at 1.0%. And the data seems to be confirming that. For the time being, I suspect that there is a little bit of upside risk in the Aussie.
If the 0.6800 level breaks this week, then there is a big chance of some short-covering and a quick pop higher. If it holds, then it will likely be on the back of USD upside.