RBA policy reaction at this stage is likely to be judged as premature

Firstly, the uncertainty about China is simply too great, and the risks are not all one-way, if China's growth prospects improve as a result of the various changes, admittedly not the most likely scenario, the impact would be positive for Australia. More importantly, recent domestic economic data has been quite positive, the currency has weakened substantially and iron ore prices have been relatively resilient. 

"Despite increased economic uncertainty about China and Asia in general, adding to doubts about the timing of the US Fed's first rate hike, the chance of a policy reaction from the RBA at this stage is minimal (say, 10%). Interestingly, although the money market is now priced for a total of 39bp of rate cuts, at the time of writing the probability of a September cut was priced at just around 10% as well", says Societe Generale. 

The generally reasonably upbeat flow of economic activity data is expected to be confirmed in the Q2 GDP  report the day after the policy meeting, no doubt the RBA's staff will have a good estimate as to what the outcome will be. Following the powerful 0.9% qoq (3.8% annualised) Q1 expansion, 0.5% qoq GDP growth, or thereabouts, would mean the economy grew at about the rate of its potential in the first half of the year.

"There is perhaps also a political obstacle that militates against a rate cut at this stage. Following China's currency regime shift, a rate cut now could be construed as an attempt at a competitive devaluation of the AUD. This would be an unwelcome development and could greatly increase uncertainty across Asia, and beyond", added Societe Generale.