RBA meeting: Hitting ‘pause’ on rate cuts? – Forex News Preview

Marios Hadjikyriacos, XM Investment Research Desk

The Reserve Bank of Australia (RBA) will complete its meeting early on Tuesday, at 03:30 GMT. Having cut rates at its latest gathering, no action is expected this time, so markets will focus on the signals for future easing. Given a string of decent data lately coupled with the US-China ceasefire, the RBA could downplay the likelihood for another cut over the next months – which may help the aussie extend its recent gains. That said, the bigger outlook is still cloudy as the trade ‘ceasefire’ seems to be on thin ice.

The aussie staged a spectacular recovery in October, rebounding from a 10-year low as the US and China reached a ceasefire in their trade battle, helping to calm some nerves about the global outlook. Likewise, a batch of decent economic data caused bets on further RBA cuts to be scaled back, exacerbating the currency’s recovery. Of course, a broadly weaker US dollar helped too.

The question facing markets now is whether all these are significant enough for the RBA to change its tune and signal less willingness to cut again, or whether the Bank will stick to its strong easing bias. On the one hand, the RBA probably doesn’t want to respond to the monthly swings in the trade war, as it may have to backpedal on any optimism if tensions escalate again, generating undesired volatility and damaging its credibility.

Yet, the central bank may also be happy with the stimulus it has already enacted and could afford to take a step back while it monitors the effectiveness of its cuts, much like the ‘pause’ the Fed has signaled recently. Arguing in the same direction, the RBA’s latest cuts seem to have spooked Australian consumers by putting the health of the economy back under the microscope, with gauges of consumer confidence falling sharply in recent months, so a ‘pause’ may indeed be a wise move.

It’s a close call, but it seems more prudent for the RBA to slightly water down its easing bias for now – for example by acknowledging the improved mood in financial markets lately and that economic data are holding up – while maintaining its commitment to act again if necessary. If so, that would argue for a minor positive reaction in the aussie.

In the bigger picture though, the outlook for the currency is still clouded. The main argument is how fragile the truce in the trade war really is. The US and China may well sign a ‘phase one’ deal later this month, but what about phase two?  That is where the thorny issues will be negotiated, and China has made it painfully clear it won’t compromise on those, setting the stage for more tensions in the coming months.

The bottom line is that after the ‘hype’ of the phase one deal quiets down, optimism about any further progress could quickly evaporate, making the RBA more likely to cut rates again in early 2020 and consequently bringing the aussie back under selling interest.

Taking a technical look at aussie/dollar, a potential move above 0.6930 could open the door for a test of the 0.7000 handle.

On the downside, the bears could stall near 0.6880 initially, with a downside break turning the focus to 0.6805.