We are about to start a brand new trading month which means central banks like the RBA will soon start dropping their policy statements for July!
What can traders expect from the RBA and how could the decision affect Australian dollar prices?
I’ve got the POIs for you!
Focus on the event:
Reserve Bank of Australia (RBA) Monetary Policy Statement
When will it be released:
July 4, 2023 (Tuesday): 4:30 a.m. BST
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- The RBA raises interest rates by last 25 basis points to 4.35%
- The RBA statement may confirm that further tightening may still be required depending on the economic and inflation data.
Relevant Australian data since the last RBA statement:
Arguments for Tightening / Bullish Aussie
S&P Manufacturing PMI It rose from 48.4 to a three-month high of 48.6 in June as output contracted at the slowest pace since February.
Unemployment rate Decreased from 3.7% to 3.6%, Net Employment +75.9K (vs. 18.6K expected, -4.0K prior) due to increased vacancies and higher demand for skilled labor
Melbourne Institute: Inflation expectations unchanged At 5.2% in June, wages are expected to grow 1.6% over the next 12 months.
🔴 Arguments for loose monetary policy / bearish Aussie
May CPI Decreased from 6.8% to 5.6% year-on-year versus an estimated decline of 6.1%
S&P Services PMI It fell from 52.1 to 50.7 even as companies continued to hire additional staff in June
Westpac – Melbourne Leading Index Further decline from -0.78% to -1.09% in May, the 10th consecutive negative reading for the index
Previous issues and the impact of the risk environment on the Australian dollar
June 6, 2023
Overlay AUD vs major currencies chart on TV Planned by TV
Action/Results: Instead of keeping interest rates steady at 3.85%, the Reserve Bank of Australia shocked the markets by raising the interest rate by 25 basis points to 4.10%.
Additionally, the official statement also shared that “further monetary policy tightening may be required.”
Not surprisingly, the Australian dollar rose broadly on the news. It also helped the commodity-linked currency that traders were bullish on speculation that Chinese regulators may soon offer support to the housing sector.
A hawkish rate hike by the RBA pushed the Aussie to fresh intraday highs and remained within the territories until the next day’s Asian session.
Risk Environment and Intermarket Behaviors: Traders started the week on an upbeat note thanks to a resolution on the US debt ceiling drama over the weekend, strong non-farm payrolls data on Friday, and a surprising production cut by OPEC+.
Speculation that the Chinese government would prop up the shaky housing sector also helped drive stocks and “risky” assets such as crude oil, the Australian dollar, the New Zealand dollar, the Canadian dollar and the pound sterling even before the RBA reversed its decision.
May 2, 2023
Overlaying the Australian Dollar Against Major Foreign Currencies: 1-Hour Forex Planned by TV
Action/Results: The Australian dollar was trading within ranges for the US session when the Reserve Bank of Australia surprised forex traders with a 25bp rate hike to 3.85% in May.
It turns out that the RBA believes that the 7% inflation rate is still “too high” and that it will take years for it to fall back to the central bank’s target range at the current rate of slowdown.
In its statement, the RBA also indicated that further tightening “may be required” to return inflation rates to their target “within a reasonable time frame.”
The sudden tightening shocked the Australian dollar over 1.0% higher than its major peers.
Risk Environment and Intermarket Behaviors: Unfortunately for risk-takers (such as the Aussie bulls), bank contagion fears dominated today’s trading in the London and US session.
Risky assets including US stocks, Bitcoin and commodity-linked currencies crashed. The Australian dollar, in particular, fell to new intraday lows and didn’t pull back until near the end of the week.
Probabilities of price movement
Possibilities of feeling risky: Tough speeches by the heads of the Federal Reserve, European Central Bank, Bank of England and Bank of Japan seem to have taken center stage so far this week to weigh on risk sentiment.
Many of them are aware that their policies are currently already very restrictive, but they also point out that inflation rates are still relatively high. So it’s not surprising that most people see the potential for prices to continue to rise further, but future decisions will still be data-driven and will still be based on guidance on a per-meeting basis.
Based on the positive reaction to risk since the ECB Central Bank Forum it appears that traders are not too concerned about future rate hikes and it is likely that we still believe we are closer to the peak of the rate hike cycle rather than the beginning and perhaps in the notion that the likelihood of The recession is not as high as we think.
But those sentiments may deviate from risk on Monday ahead of the RBA statement with the next set of global PMI updates, as many of the countries surveyed are expected to show further weakness. Keep in mind that this round is the final read so the feedback may not be great, but it is something to be aware of before making your risk sentiment forecast.
Australian dollar scenarios
Base case: Based on the aforementioned economic data and the RBA’s June statement saying that further tightening “may be required”, Governor Lowe and his team are likely to raise interest rates by another 25 basis points to 4.35% next week.
But based on the recent downtrend in the Aussie, it appears that not many traders are convinced of another price hike, though, which means the confirmed outcome of this event is very low. The low certainty also means that the odds are high for another volatile reaction for the Australian dollar that could continue into the US trading session.
As in the June decision, the RBA’s July event will happen on Tuesday. So, depending on the overall risk sentiment late Friday and/or early Monday, the AUD price reaction to the RBA rate hike could make or break an uptrend for the week.
A “hawkish RBA rate hike” scenario (where the RBA focuses on relatively higher inflation/continuous labor force rate rather than a slower CPI rate) could attract AUD bulls against other currencies such as the NZD, CAD and safe havens Like the Japanese yen and the euro, especially if positive risk sentiment dominates.
Alternative scenario: A “hard pause” is another scenario to consider, as the RBA decided to keep rates at 4.10% but points to more hikes to come. There is a possibility that the slowdown in May’s CPI and softening business conditions has spooked the RBA into thinking it was time to stop.
Now, since the Aussie has been under pressure since mid-June, the reaction may not be as straightforward as we could actually see a “buy the rumor, sell the news” scenario, where anticipation of a pause would lead to profit taking (i.e. buying back their shorts ).
If this is the case and risk sentiment is positive, look for higher technical setups in AUDJPY, EUR, CAD for a short-term bounce before considering your risk management plan.