Welcome to a brand new month of trading!
As in most months, the RBA will lead the central bank group in sharing recent monetary policy decisions.
What can the markets expect from the RBA event and how could the central bank’s decision affect AUD price trends?
Focus on the event:
Reserve Bank of Australia (RBA) Monetary Policy Statement
When will it be released:
June 6, 2023 (Tuesday): 4:30 a.m. BST
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- The Reserve Bank of Australia keeps interest rates on hold at 3.85%.
- 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
Annual monthly inflation Acceleration from 6.3% yoy in March to 6.8% yoy in April (vs 6.4% expected)
wage price index It showed another gain of 0.8% qoq, below the estimated 0.9% increase.
The Melbourne Institute Consumers Expected Inflation The rate accelerated from 4.6% to 5.0% in May
🔴 Arguments for loose monetary policy / bearish Aussie
own capital expenditures Slowing from 3.6% in the fourth quarter to a seasonally adjusted 1.3% in the first quarter of 2023
retail It was unchanged at A$35.3 billion in April and supported talks that retail spending has peaked in the past six months.
PMI flash manufacturing Unchanged at 48.0 in May
PMI Flash Services It decreased from an improved reading of 53.7 to 51.8 to reflect slowing industry expansion
Employment change april It showed a surprising 4.3K in employment losses against an estimated profit of 24.8K, the previous reading rose from 53K to 61.1K in employment gains, the unemployment rate rose from 3.5% to 3.7%
Previous issues and the impact of the risk environment on the Australian dollar
May 2, 2023
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 the Aussie bulls, banking contagion fears dominated today’s trading session in London and the US.
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.
April 4, 2023
Action / Results: The Australian dollar started the week strong but ended up giving back those early gains and more when the Reserve Bank of Australia announced its decision to stop tightening.
In addition, their official statement toned down hardline rhetoric from ‘More emphasis needed’ to ‘More emphasis may be needed’ Many took this as a sign that policymakers will sit by for a while longer.
This was later followed by a speech by RBA President Lowe, during which he noted that “The decision to keep interest rates steady this month does not mean that interest rate increases are over.” And that “At our next meeting, we will again review the monetary policy stance while benefiting from an updated set of forecasts and scenarios.”
Risk Environment and Intermarket Behaviors: It’s been a particularly busy week in terms of central bank decisions and high-profile economic releases, but price action has deflected risk as the shortened trading week continues.
The re-emergence of recession fears, mostly stemming from the downbeat US JOLTS job data, has left market players on edge and favoring lower-yielding currencies.
Probabilities of price movement
Possibilities of feeling risky: “Risk” assets such as the Australian dollar were on shaky ground against their safe-haven counterparts, as easing concerns about the US debt ceiling re-lighted growth jitters.
Specifically, the missing key data from major economies *cough* China and Germany *cough* are bringing back concerns that a relatively high interest rate environment will stifle the global economic recovery.
If the risk averse trading environment extends into next week, the Australian dollar will trade in the same risk environment as in the last two meetings. It will be easier for the Australian sellers to pounce if the markets decide that the RBA’s decision is not tough enough.
Australian dollar scenarios
Base case: During his recent testimony before Australian policymakers, RBA Governor Lowe admitted that one of the reasons the central bank surprised the rate hike in May was to reinforce the notion that the RBA remains committed to its fight against inflation.
But on the data side, the economy’s performance remains broadly within central bank expectations.
While annualized monthly inflation surprisingly accelerated from 6.3% to 6.8% in April, a closer look showed that excluding “volatile” items such as holiday travel would bring the CPI closer to 6.5%.
Meanwhile, unexpected employment losses and a rise in the unemployment rate in April fuel the RBA’s belief that inflation has peaked.
This is why the RBA may keep interest rates unchanged at 3.85% even as it warns of higher interest rates in the future depending on economic data.
A “tough wait” in a risk averse trading environment could lead to a sharp rally during the report release and then profit taking (read: AUD losses) during the London and US sessions.
In the event of Australian dollar weakness, consider shorting the dollar against safe havens such as the US dollar, Japanese yen and Swiss franc, or US dollar counterparts such as the New Zealand dollar and the Canadian dollar if risk sentiment is positive during the session.
Alternative scenario: If RBA members feel like reinforcing their commitment to fighting high inflation again, we could see another surprise rate hike from the central bank.
The Australian dollar could rally higher again and gain pips across the board during the Asian session.
Then, depending on the overall risk environment, an RBA rate hike could set the tone for intraday AUD bullish trends or set intraday AUD highs before returning to daily open levels in the following trading sessions.
The Australian dollar’s strength is usually most evident against safe-haven currencies such as the US dollar and Japanese yen, as well as the “twin” AUD/NZD during recent event releases.