When it comes to today’s RBA rate decision, the reaction of financial markets will largely come down to the final paragraph of the bank’s monetary policy statement.
Although there is a tiny chance that the RBA will follow up its May rate cut with another, going “back-to-back” as the saying goes, in reality the movements in bonds and the Australian dollar will be determined by the bias the bank offers on its outlook for interest rates.
Most expect that the RBA will reinsert an easing bias, indicating that rates are still likely to fall further in the period ahead, although that’s not a universal view.
In a statement that will contain a few hundred words, it will be just one sentence that markets will focus on, at least initially.
Courtesy of Prashant Newnaha, a FX and rates strategist at TD Securities in Singapore, comes this excellent infographic as to what the likely market reaction will be to the wording of the final paragraph of the statement.
Newnaha suggests that there’s only a 5% chance that the RBA will deliver a rate cut, mirroring the sentiment expressed by the vast majority of economists and those in markets.
Should the bank keep rates on hold at 1.75%, Newnaha believes it will be a tight call as to whether or not the bank will insert an explicit easing bias, attaching a 60% probability that this scenario will eventuate.
That leaves a 40% chance that the RBA will not explicitly signal that rates are likely to move lower, in his opinion.
Should that scenario eventuate, something that he believes “would be a shock”, it will generate significantly greater levels of market volatility given widespread expectations at present that the RBA will cut rates yet again, most likely in August.
Newnaha believes that the absence of an explicit easing bias could see the AUD/USD soar to as high as .7500 as expectations for a rate cut in August are scaled back to below 50%.
“Price data since the May SOMP has been weak. Annual wage growth hit a record low as per the Q1 Wage Cost Index, Q1 GDP revealed weak price pressures with weak deflators and unit labour costs and The Melbourne Institute Inflation Gauge Trimmed Mean print fell to 1%/yr, with annual tradable and non tradables measures dropping further,” says Newnaha.
“This should keep a RBA August cut on the table.”
The RBA rate decision ad policy statement will be released at 2.30pm AEST.