Likely renewed pressure on AUD as rate cut discussion intensifies and Chinese data shows disappoints

The RBA board minutes (Tuesday) are more important than usual should they contain any discussion of bank funding costs. The risk of a cut has increased because one large domestic bank recently announced that it is increasing all variable mortgage rates by 20bp to compensate for the regulator's requiring it to hold more capital, where the regulator is seeking to even up competition with smaller lenders. This decision is significant because other large banks may also raise mortgage rates and since the RBA has repeatedly said that when setting policy, lending rates matter more than the level of the cash rate.

"Our central case for the RBA is that the cash rate remains on hold at 2% all next year, although we continue to see the risk of a cut, given the more uncertain outlook for China", notes Barclays. 

Although a larger risk of a rate cut is likely because of this development, the RBA will automatically cut the cash rate to offset the mortgage rate hikes by the large banks. However, there has been indirect signalling that the RBA may cut rates if other banks follow the first one's lead. This suggests that the RBA had been assuming that the large banks would either raise mortgage rates in line with the regulator's analysis or confine the rate rises to investor home loans. It is assumed that the RBA now has a reasonable idea of the other banks' intentions, where an outsized move in rates could push the RBA over the line for a November cut. 

"We still think policy will remain on hold, but the risk of a move has increased, and we will be looking for more indirect signalling from the RBA, possibly reinforced by judicious editing of next week's board minutes, as we wait for the large banks to announce their plans", added Barclays.

Additionally, a weaker set of Chinese activity data could add further downward pressures on the AUD driven by increased rate speculation