With the RBA near universally expected to hold rates unchanged when it meets on Tuesday, the focus is on what kind of guidance it might provide. But for the AUD/USD, the risk factors this week might actually be outside of the country. Commodity currencies could see extra volatility in the coming days, but it could still be up to the RBA to see where the rollercoaster ends.
The RBA is one of the few central banks that are still on a hiking bias, with the Australian economy giving indicators that it remains hot. Despite slower performance in China, the country’s largest trade partner, Aussie consumer demand remains strong. Additionally, the RBA had previously paused its rate hiking a little too soon, which might make it extra hesitant to finally declare victory over inflation and start turning things around.
The Data Coming into Line
Last week, Q3 inflation on the headline was reported as falling substantially back down to 2.8% from 3.8% prior. That would put it into the RBA’s target range of 2-3% (though it usually prefers closer to the midpoint). However, that reduction was reported to come mostly from temporary things, such as government rebates on energy and lower costs for fuel at the pump. The RBA has said in the past that it doesn’t take into account those kinds of moves when it evaluates policy.
More importantly, with the bulk of the non-government moves coming from lower fuel prices, inflation isn’t out of the woods. The end of last quarter coincided with a recent low in global petroleum prices. That implies that fuel prices are likely to rise again in the final quarter of the year, pushing headline inflation upwards. That is, unless there is a major shake up in global markets to push prices back down again in the final stretch of the year.
Holding the Line
Meanwhile, the RBA’s preferred measure for inflation – the trimmed mean – last quarter came down to 3.5% from 4.0% prior. That is a strong move in the right direction for the RBA, but still not within the target range. Although the RBA could do like other central banks and move even before the rate has reached the target, it has proven so far to be extremely hesitant to do so.
Additionally, the labor market in Australia remains quite strong, with labor costs putting upward pressure on inflation. This seems to be the key focus for the RBA right now, as well as housing, where prices also aren’t cooperating. With this in mind, the Reserve Bank might decide that it’s worth continuing to signal hawkishness to try and push down these two areas where inflation is particularly stubborn.
What the Market’s Looking For
While there is considerable disagreement on the timing, economists and the market are all convinced that the next move from the RBA will be a cut. That’s despite the RBA continually signaling that a hike is still on the table. What could get markets to start pricing in easing in the near term would be if the RBA dropped that signal of rate increases being still a possibility.
Keeping the rhetoric just as it is could still leave the Aussie moving as markets survey the potential effects of the US election later in the day. A Trump victory is generally thought to imply a stronger dollar, which could hurt the AUD/USD. The exchange rate could fall quite a bit if the RBA stops talking about rate hikes and the dollar gets stronger later in the day.
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