RBA rate decision preview

Reserve Bank of Australia (RBA) will announce its monetary policy decisions today at 4:30 GMT.

Economy at a glance –

• The economy is growing at 3.1 percent y/y as of Q1 2018 compared to 4.3 percent in early 2012. But growth has increased from 1.8 percent in the first quarter of 2017.
• The unemployment rate has declined to 5.4 percent as of now. It has declined from 6.3 percent in 2014, despite regular increases in the participation rate.
• RBA maintaining Interest rate at 1.5 percent.
• The inflation rate is currently at 1.9 percent as of the first quarter of 2018. Down from 2.1 percent in the first quarter of 2017, which was the highest since the second quarter of 2014.
• Australia’s terms of trade have improved to the highest level since early 2014.

Iron ore, which contributes to 20% of the country’s export and 4% of GDP has recovered steadily since early 2016. However, it has declined almost 20 percent since February.

RBA stance –

• RBA is currently pursuing a neutral monetary policy path. It has shifted away from a dovish stance, however, remains far from being hawkish. In previous statements, it has clearly indicated its worries about the international situation, despite the confidence over the economy.
   
• RBA has clearly indicated that Australian dollar remains quite overvalued and feels that a falling exchange rate would benefit the economy and balance the risks.

Expectation today –

• Economists surveyed by Bloomberg, expects RBA to keep rates on hold, however, possibilities of a rate hike in future remains at large.

Market impact –

• The Australian dollar is declining after a steady rise of 700 pips since December 2017 and reaching 0.82 area. The Australian dollar is currently trading at 0.734 against the USD. It is undergoing sell breakout.
   
• There is unlikely to be an impact, should rates remain on hold. However, upsides are limited against dollar unless key resistances around 0.75 area cleared and would be guided by broad-based dollar strength.
   
• Any dovish bias would cause havoc to the downside for the Aussie as policy neutrality is expected.