It’s RBA rates day.
With economists and markets split on whether or not the RBA will cut rates to a record-low level of 1.5%, investors are primed for some wild price action come 2.30pm in Sydney, one way or another.
20 of 25 economists polled by Bloomberg expect rates to be cut. Cash rate futures are a little less certain, attaching a two-in-three chance that a rate cut will be delivered.
About the only thing that is certain is that there’ll be plenty of volatility, particularly should the RBA refrain from cutting rates.
Given the degree of uncertainty, markets are understandably pondering what exactly will happen in the immediate aftermath of the decision.
Prashant Newnaha, a rates strategist with TD Securities, believes he knows what will likely eventuate for the Australian dollar and Australian interest rate futures no matter what way the RBA decides to go.
The excellent flow chart below, produced by TD, shows what it expects will eventuate, even attaching a probability of each outcome occurring. The research note was released late on Monday afternoon, so the spot rates communicated are slightly dated, particularly for the AUD/USD which currently trades at .7530. Still, it provides an indication on the scale of the market move expected given a variety of scenarios.
As it reveals, TD, as opposed to the majority of economists and those in financial markets, attaches a greater probability that the cash rate will be left unchanged at 1.75%, putting the odds of a no-change decision at 65%.
“Remember the May RBA minutes?” asks Newnaha.
“They revealed that even after the magnitude of the large Q1 CPI miss, the Board debated whether to cut or wait. Surely after Q2 CPI came in as per its own expectations, the decision for the RBA must be easier now than prior to the May meeting.
“The ECB and BoJ also left rates on hold. Other than the RBNZ needing to cut (and BoE priced for a 25bps post Brexit cut), does the RBA need to go?”
That question will be answered soon enough.
While TD is in the minority, it’s clear that the conviction of those calling for a rate cut is hardly strong heading into the event.
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