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3 Jun 2014
RBA preview: Return to jawboning the currency unlikely
FXStreet (Bali) - The RBA is due to publish their policy decision at 4.30GMT, and while there is no changes expected in the record low 2.5% rate, there will be plenty of attention on the accompanying statement.
During the course of 2014, the RBA meetings have been characterized by a progressive reinforcement of the neutral bias. Each meeting has provided further reassurance that rates will remain low for the foreseeable future, although at the same time, no clues were given to get AUD bulls excited on rate hike expectations, at least not for the next 12 months, according to the future swap rates curve.
There is some market talk that today, the central bank may struck a more dovish tone amid falling consumer confidence, housing sales slowing down, the index of commodity prices declining and disappointing retail sales. These factors have led some market commentators to speculate that the RBA may also step up its verbal campaign against the Australian Dollar.
However, in the last month, the RBA has also received encouraging positive inputs that suggest the Australian economy is in the right track, from improving employment conditions, to brighter outlook on capital spending and activity picking up in China.
For those supporting a resumption of the RBA jawboning, which could be justified on the RBA commodity price index dropping further in May, it is important to put things into perspective. The index fell by over 1% last month, while in 2014 alone it stands almost 10% lower. Interestingly, the RBA has been gradually moving away from jawboning the currency since early 2014, thus seems safe to assume that speculating on an increased risk of jawboning based on falling commodity prices alone is debatable, to say the least.
One market commentator supporting an increase in the dovish rhetoric is David Scutt, Independent Strategist writing at the blog www.marketscuttlebutt.com, who said: "Recent domestic developments are likely to see a more-dovish tone struck when it hits the screens this afternoon. I expect the RBA will use more forceful language on the level of the Aussie, particularly in light of recent sharp declines in the price of our key commodity exports, along with acknowledgement that recent falls in consumer confidence may see activity in non-mining sectors be less robust than what may have been envisaged earlier in the year." Despite Scutt is expecting a more-dovish tone, he does not envisage a removal of the neutral bias for now.
Greg Gibbs, FX Strategist at RBS, also mentions the mounting risks of a return to the jawboning: "The risk is that the RBA highlights the divergence between the AUD and commodity prices, and note that it places greater downside pressure on incomes and the growth outlook."
However, as exposed above, there is little correlation seen this year between the two parameters, which suggests that the RBA's softer jawboning approach towards the AUD has to do more with other factors.
ANZ foreign exchange strategist Daniel Been was quoted a few weeks back at AFR noting that the RBA is not likely to return jawboning the AUD: "I think there are a couple of reasons, first that the domestic economy is on a more sustainable footing than it was in 2013 and appears to be coping relatively well with the AUD at these levels, and second is that it is very hard to gain traction with rhetoric at a time where the USD is struggling to rally broadly."
Only when/if evidence is gathered that the economy is stalling and/or house prices/sales cool down, currently a risk to increase rate hike expectations, will the RBA return with more confidence to struck a more-dovish tone. Until then, expect little changes in rhetoric.
The Aussie price action in the lead up to the RBA seems to be giving mixed signals, with last week's rise above the 0.93 greeted by steady selling at the beginning of this new week. The latest decline in the AUD, which saw speed picking up after a disappointing building permits print yesterday, has market commentators thinking that some of the dovish expectations for today have already been priced into the market, which is hard to tell, especially when the context price is trading in is still one in which a short term bias can still not be defined.
During the course of 2014, the RBA meetings have been characterized by a progressive reinforcement of the neutral bias. Each meeting has provided further reassurance that rates will remain low for the foreseeable future, although at the same time, no clues were given to get AUD bulls excited on rate hike expectations, at least not for the next 12 months, according to the future swap rates curve.
There is some market talk that today, the central bank may struck a more dovish tone amid falling consumer confidence, housing sales slowing down, the index of commodity prices declining and disappointing retail sales. These factors have led some market commentators to speculate that the RBA may also step up its verbal campaign against the Australian Dollar.
However, in the last month, the RBA has also received encouraging positive inputs that suggest the Australian economy is in the right track, from improving employment conditions, to brighter outlook on capital spending and activity picking up in China.
For those supporting a resumption of the RBA jawboning, which could be justified on the RBA commodity price index dropping further in May, it is important to put things into perspective. The index fell by over 1% last month, while in 2014 alone it stands almost 10% lower. Interestingly, the RBA has been gradually moving away from jawboning the currency since early 2014, thus seems safe to assume that speculating on an increased risk of jawboning based on falling commodity prices alone is debatable, to say the least.
One market commentator supporting an increase in the dovish rhetoric is David Scutt, Independent Strategist writing at the blog www.marketscuttlebutt.com, who said: "Recent domestic developments are likely to see a more-dovish tone struck when it hits the screens this afternoon. I expect the RBA will use more forceful language on the level of the Aussie, particularly in light of recent sharp declines in the price of our key commodity exports, along with acknowledgement that recent falls in consumer confidence may see activity in non-mining sectors be less robust than what may have been envisaged earlier in the year." Despite Scutt is expecting a more-dovish tone, he does not envisage a removal of the neutral bias for now.
Greg Gibbs, FX Strategist at RBS, also mentions the mounting risks of a return to the jawboning: "The risk is that the RBA highlights the divergence between the AUD and commodity prices, and note that it places greater downside pressure on incomes and the growth outlook."
However, as exposed above, there is little correlation seen this year between the two parameters, which suggests that the RBA's softer jawboning approach towards the AUD has to do more with other factors.
ANZ foreign exchange strategist Daniel Been was quoted a few weeks back at AFR noting that the RBA is not likely to return jawboning the AUD: "I think there are a couple of reasons, first that the domestic economy is on a more sustainable footing than it was in 2013 and appears to be coping relatively well with the AUD at these levels, and second is that it is very hard to gain traction with rhetoric at a time where the USD is struggling to rally broadly."
Only when/if evidence is gathered that the economy is stalling and/or house prices/sales cool down, currently a risk to increase rate hike expectations, will the RBA return with more confidence to struck a more-dovish tone. Until then, expect little changes in rhetoric.
The Aussie price action in the lead up to the RBA seems to be giving mixed signals, with last week's rise above the 0.93 greeted by steady selling at the beginning of this new week. The latest decline in the AUD, which saw speed picking up after a disappointing building permits print yesterday, has market commentators thinking that some of the dovish expectations for today have already been priced into the market, which is hard to tell, especially when the context price is trading in is still one in which a short term bias can still not be defined.