The Reserve Bank of Australia (RBA) is widely expected to maintain the Official Cash Rate (OCR) at 3.6% after its November monetary policy meeting on Tuesday. The decision will be announced at 03:30 GMT.
The Monetary Policy Statement (MPS) will be accompanied by the quarterly economic forecasts, followed by RBA Governor Michele Bullock’s press conference at 04:30 GMT.
The Australian Dollar (AUD) remains at risk of experiencing intense volatility on any surprises in the central bank’s updated projections or Governor Bullock’s press conference.
RBA on-hold again, cautious on future rate cuts?
While speaking at the Australian Business Economists’ Annual Dinner, in Sydney, on October 27, RBA Governor Bullock noted that “inflation is back in the target band and the Unemployment Rate is still pretty low, so still in good condition.”
Bullock said further that “we will have to decide whether a cut is needed to help the job market,” as “there’s still a bit of tightness in the labor market.”
The Minutes of the RBA’s September monetary policy meeting also highlighted that “labor market is still a little tight,” and that “forward indicators are steady.”
Bullock’s words and the RBA Minutes clearly indicate that the central bank’s focus is on the labor market amid an impressive jump in the Australian Consumer Price Index (CPI) by the most in 2-1/2 years in the September quarter.
On October 29, the data released by the Australian Bureau of Statistics (ABS) showed the CPI rose 1.3% in the third quarter, beating the forecast of 1.1% growth.
The annual CPI inflation rate leaped to 3.2%, from 2.1%, breaking through the top end of the RBA’s 2% to 3% target band.
Meanwhile, the Unemployment Rate jumped to an almost four-year high of 4.5% in September, according to the ABS data, topping the RBA’s peak forecast of 4.3%. However, employment increased by 14,900 people in September.
Amid red-hot inflation and a still healthy labor market, the RBA will likely hold its rein on further monetary easing, maintaining its cautious rhetoric.
Markets price in just an 8% chance that the RBA will lower the rate on Tuesday, down from 40% before the inflation data. The probability of a cut in December is now seen as less than 25%, per Reuters.
“Over the next 12 months, cash rate futures price in just one 25 basis points (bps) cut and the policy rate to bottom at 3.35%,” analysts at BBH noted.
That being said, the updated economic projections and the MPS will be closely scrutinized for fresh hints on the central bank’s path forward on rates.
How will the Reserve Bank of Australia’s decision impact AUD/USD?
The AUD is consolidating its correction from three-week highs of 0.6618 against the US Dollar (USD) heading into the RBA policy announcements.
If the RBA downgrades its inflation and growth forecasts, while flagging increased risks to employment, it could revive the odds of a 25 bps rate cut in December, triggering a fresh corrective decline in the AUD.
The Aussie could also regain downside traction if RBA Governor Bullock reveals that the board discussed a 25-bps rate cut at the meeting and some members dissent in favor of such a move.
On the other hand, if Bullock sticks with the bank’s cautious approach on further rate cuts, while sounding upbeat on the labor market, AUD/USD could see a fresh advance toward the multi-week highs.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical levels for trading AUD/USD following the policy announcement.
“AUD/USD has managed to defend the critical demand area near 0.6535, where the 100-day and 21-day Simple Moving Averages (SMA) align. The 14-day Relative Strength Index (RSI) holds its position just above the midline, currently near 51.50. These technical indicators suggest that buyers could retain control going forward.”
“The Aussie pair could stretch the recovery beyond the 50-day SMA at 0.6562 on a cautious hold decision. The next topside targets are seen at the three-week highs of 0.6618, followed by the 0.6650 psychological level. On the flip side, a sustained break of the abovementioned confluence support near 0.6535 could initiate a fresh downtrend toward the 200-day SMA at 0.6444,” Dhwani adds.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
