The Reserve Bank of Australia is scheduled to announce its new monetary policy this Tuesday, and the market is bracing for a potential lowering in the interest rate to 1.25% from the current rate of 1.50%. If the consensus is realized, then this will be the first change in the rate by the RBA since August 2016.
“In Australia, long-term bond yields have fallen to historically low levels, and short-term bank funding costs have moderated further. […] There has been a significant increase in employment and the unemployment rate is at 4.9 per cent. […] Inflation remains low and stable” [source]
The RBA has also attributed lower growth in the farming sector to a recent draught, and most importantly, it expected a short-term fall in headline inflation because of the global decrease in oil prices. However, there are significant indications to suggest that the overall picture in the Australian economy is headed for the worse, and thus the RBA can indeed be compelled to act now to prevent further disruptions.
As regards unemployment, the most recent data shows that the overall unemployment rate rose with 0.1% to a total of 5% since RBA’s last meeting, thus indicating that the labour market in the country is not as resilient to global turmoil as previously thought.
Despite the RBA’s acknowledgement of the global developments in the oil market and the possible consequences for the national inflation rates, the demand for the black gold seems to be headed for the worse, as a global selloff becomes more and more apparent every day. This trend is becoming especially overt after the recent talks of a possible collapse of OPEC (you can read more about it in our article here). As a result of that, the overall inflation rate in Australia has fallen to 1.3% from the previous rate of 1.8%, thus giving the RBA a strong incentive to rethink its overall stance, especially since inflation seems to be a rising concern for other national economies as well.
The historically low bond yields can also turn out to be a ticking bomb in disguise, as the RBA further stated that:
“[…] higher levels of spending on public infrastructure and an upswing in private investment are supporting the growth outlook.”
However, since the core inflation seems to be deteriorating instead of an expected rise in the overall CPI from an increased government spending, that can testify to an ineffective monetary policy by the central bank, and thus boosting the prospects for a decrease in the interest rate.
Overall, as the situation continues to develop, a lower interest rate would seem to be more accommodative of increased consumer and investor spending, which in turn can swing the core inflation back to the desired 2% level.
The AUDUSD is currently testing the bottom line and support level of 0.69884 which is a part of the established range on the daily chart. Provided that the market has not priced in a potential lowering of the interest rate, the price action is likely to test the strength of the support level by the end of this week.
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