The RBA rate decision looks set to rattle the Australian dollar

Photo by George Wilhelm/Los Angeles Times via Getty Images

It’s going to be an another crazy session for the Australian dollar.

Following the release of Australian building approvals and international trade figures for June earlier in the session, markets will be focused on one event and one event only later this afternoon: the Reserve Bank of Australia’s August interest rate decision.

Be it markets or economists, the financial community has been split on whether or not a further rate cut — taking the cash rate to a fresh record-low of 1.50% — will be delivered.

With so much uncertainty bottled up within the markets, it suggests that no matter which way the RBA decides to go, it’ll lead to some extreme financial market volatility, especially for the Aussie.

Throw in an announcement from the Japanese government relating to its fiscal stimulus package — an event where there is no scheduled release time — and you sense just how on edge markets will be on Tuesday.

According to Richard Grace, chief currency strategist at the Commonwealth Bank, the RBA rate decision will be “a very close call”.

“The RBA’s decision on whether to cut the cash rate is entirely driven by the inflation outlook,” says Grace. “It is not because the Australian economy desperately needs additional stimulus to support demand.”

“Our house view is the RBA cuts interest rates. This would modestly weaken the AUD lowering it to 0.7400, and perhaps a touch below over the next 24 hours. A decision not to cut the cash rate would see AUD rally back above 0.7600,” he adds.

For those looking for further information on the RBA rate decision, this 10-second guide will bring you up to speed.

While there will be interest in the local economic data released at 11.30am AEST today, it’s unlikely to lead to a substantial reaction in financial markets.

Markets are hanging out for the RBA rate announcement at 2.30pm AEST. Like a spring under pressure, the rate announcement will either see the Aussie break lower or spring significantly higher. Volatility is all but assured.

The Japanese fiscal stimulus announcement will also add to volatility in the Aussie, largely as a consequence of the influence of the USD/JPY on the broader US dollar index.

In overnight trade the AUD/USD drifted lower, unwinding all of the gains seen in the immediate aftermath of the US Q2 GDP report released on Friday.

It eventually closed Monday’s session buying .7534, well below the session high of .7615 struck in Asian trade.

AUD/USD 5-Minute Chart

“AUD moved lower against the major cross rates as lower crude oil prices, a lower Chinese July PMI, and lower equity markets put a slight dampener on the global economic outlook, and as participants began to focus on the 66.5% probability priced into the interest rate market that the RBA could cut the official cash rate today,” said Grace.

Here’s the Aussie dollar scoreboard, as at 8am AEST.

  • AUD/USD 0.7532 , -0.0002 , -0.03%
  • AUD/JPY 77.08 , -0.05 , -0.06%
  • AUD/CNH 5.0043 , -0.0024 , -0.05%
  • AUD/EUR 0.6746 , -0.0001 , -0.01%
  • AUD/GBP 0.5713 , -0.0002 , -0.03%
  • AUD/NZD 1.0500 , -0.0002 , -0.02%

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.