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 1.7 percent y/y compared to 4.3% in early 2012.
• The unemployment rate has declined to 5.5 percent as of now.
• The interest rate is at 1.5 percent.
• The inflation rate is currently at 2.1 percent.
• After improvement since last year, Australia’s terms of trade have started declining once more.

Moreover, Australian economy continues to face headwinds from weakening growth prospect in China and lower price of its export commodities. Iron ore, which contributes to 20% of the country’s export and 4% of GDP is now down more than 25 percent so far this year. However, it is important to note that the trend changed to bullish recently as it is up more than 20 percent from the bottom.

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 domestic and international situation, along with some confidence over the economy.
   
• RBA has clearly indicated that Australian dollar remains quite overvalued and feels falling exchange rate to 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 remain at large.

Market impact –

• Australian dollar currently is up on weaker dollar and stronger commodity price. The Australian dollar is currently trading at 0.767 against the USD. It is struggling to clear resistance around 0.77 area.
   
• There is unlikely to be an impact, should rates remain on hold. However, upsides are limited against dollar unless key resistances till 0.78 cleared and would be guided by broad-based dollar strength.
   
• Any dovish bias would cause havoc to the downside as policy neutrality is expected.