RBA policy meeting: slow but sure – Forex News Preview



The Reserve Bank of Australia (RBA) will review its policy settings on Tuesday at 03:30 GMT, but with guidance already settled until the end of the year, expectations are low for any drastic changes. Hence, the reaction in the aussie could be limited, though with the currency pushing for a rotation recently, any solid statements could create some volatility.

Guidance set until February

Despite the pandemic jitters and the prolonged lockdown measures, the RBA surprisingly decided to move forward with its bond tapering plans last month, slashing its weekly asset purchases by A$1 billion to A$4 billion. The hawkish announcement, however, was tinged with some dovishness, with the RBA governor Philip Lowe pledging to keep the pace of its QE program steady at the current pace until at least mid-February 2022 than to “mid-November “as previously stated.

Addressing an online event on a few days later, Lowe admitted that monetary policy could do little to avert a hit in demand in the third and fourth quarters, adding that a significantly larger contraction during Q3 could be possible before the economy starts to recover at the end of this year, hopefully on the back of cashed-up consumers. He also questioned analysts’ prospects for a rate hike as early as 2022 and 2023, underlining that the central bank will only hike rates once inflation sustainably returns to the 2-3% target and wage growth moves convincingly above 3.0%, which is not expected to take place before 2024.

RBA to maintain dovish tone 

Hence, given Lowe’s recent dovish tone, the RBA will likely maintain the same mood this week, reiterating that bond purchases will remain stable at current levels and borrowing costs unchanged until a new revision takes place in February, and perhaps until policymakers get some relieving signs that the curb relaxations in Sydney and other key regions, as well as, the lifting of the 18-month-old ban on international travelling from November are bearing fruit as vaccinations notably progress.

The China factor

The above suggests that upcoming economic data such as next week's employment figures may cause larger volatility to the aussie than the policy announcement itself this week. Yet, domestic challenges are not the only headwind for the aussie. External factors such as international trade activities and particularly China’s economic performance tend to be a key topic of discussion during the RBA gatherings given the close trade relation between Australia and China.

Prime Minister Scot Morrison has played down the case of a global financial crisis in the face of Evergrande’s default, while the RBA has clarified that it is not planning to raise interest rates to mitigate the rapid increase in Australian house prices, arguing instead that this is an area outside the monetary policy spectrum.

Nevertheless, Australia’s department of industry, energy and sources have issued a warning last week that the slowing construction activities and the implementation of a number of government policies in China have reduced demand for iron ore and hence pressed its price lower.

Note that Beijing has already banned a number of Australian products such as coal and wine as part of a continuous dispute with the country. Therefore, with iron ore plunging by more than half since May, Australian producers will likely be vulnerable to China’s potential downturns, and the central bank may not be able to ignore that if indeed negative spillovers emerge from China, dampening the outlook for the labor market.

AUD/USD

Technically, aussie/dollar needs a decisive break above the 0.7315 resistance territory to extend its latest upturn towards the 0.7400 level. The RBA could trigger that move if it surprisingly diminishes risks from China, sounding at the same time more optimistic about Australia’s recovery on the back of the reopening phase. On the flip side, if policymakers further enhance the dovish commentary, signaling that the central bank will act slowly but surely in the coming months even if that means more delays to bond tapering, aussie/dollar could correct back down to 0.7185.

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