Australian Dollar Looks to RBA Rate Decision to Break Deadlock

Fundamental Forecast for Australian Dollar: Neutral

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The Australian Dollar spent a fourth week in consolidation having started the month with a drop to the lowest level in nearly six years against its US counterpart. That move was triggered by a surprise interest rate cut from the Reserve Bank of Australia, and prices have since stalled as investors weigh the possibility of further easing. The deadlock is likely to be broken in the week ahead as policymakers gather for another policy meeting.

A survey of 29 economists polled by Bloomberg is narrowly leaning toward stimulus expansion, with 18 of those queried calling for the benchmark lending rate to be lowered by 25 basis points to 2 percent. Traders are bit more dubious: priced-in expectations reflected in OIS rates reflect a 56 percent probability of a reduction. This means that regardless of which direction the RBA opts to take, nearly half of investors will find themselves wrong and scrambling to readjust portfolios accordingly. Needless to say, this is likely to make for a volatile response no matter what outcome ultimately hits the wires.

Whatever the initial reaction however, follow-through will be far from certain as high-profile event risk emerges on the external front and threatens to pull the Aussie into its orbit. February’s US Employment report stands out as particularly critical as investors continue to speculate about the timing of the first post-QE interest rate hike from the Federal Reserve. Expectations call for a slight slowdown in job creation, with payrolls posting a 235,000 increase compared with 257,000 added in the prior month.

US news-flow has tended to underperform relative to forecasts in recent months, hinting economists continue to overestimate the vigor of the world’s largest economy and opening the door for a disappointing jobs figure. Such a result may pour cold water on bets calling for the onset of FOMC policy normalization by mid-year. That is likely to weigh on the US Dollar, offering a lift to the Australian unit that either cuts short weakness or amplifies strength seen after the RBA announcement, depending how Glenn Stevens and company ultimately decide to proceed.

Australian Dollar Looks to RBA Rate Decision to Break Deadlock