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AUD at Risk: Dovish RBA Surprise Incoming?



Things could get choppy for AUD overnight; we have the latest rate decision from the Reserve Bank of Australia at 0430BST/2330EDT.


Expectations: Most analysts expect the RBA to stay on hold with rates at 0.25% tonight. Indeed, since the last RBA meeting on September the 1st, data has broadly been better than expected (particular emphasis on the August jobs report, which showed a surprise expansion in employment despite harsh lockdowns in Victoria). However, money markets price a near 90% chance that the bank will cut rates to 0.10%, given recent dovish remarks from RBA Deputy Governor Debelle a few weeks ago (more below). Most analysts who are not calling for a rate cut are at least calling for a dovish shift in the tone of the bank on the prospect for further stimulus, ahead of further easing in November.


Deputy Governor Debelle: The RBA Deputy Governor recently surprised markets with dovish comments on the 22nd of September. He said that the board continues to assess other monetary policy options; one option under consideration was buying bonds at a longer dated maturity, another to conduct direct FX market intervention (although he said he was unsure whether this would be effected given that, in his view, AUD is fairly priced) and another option would be further rates cuts, perhaps even into negative territory. This speech contrasted strongly with prior RBA rhetoric (previously the RBA had indicated a hands-off approach to FX, as well as ruling out negative rates).





Budget: The Australian government unveils a fresh round of fiscal stimulus on the same day as the RBA meeting (but in the evening and after the RBA meeting). Credit Agricole note that many in “the market think that this timing suggests the RBA will cut rates the same day the government introduces a fresh round of fiscal stimulus in order to demonstrate to the public another all-out effort by ‘Team Australia’ to boost the economy” - Team Australia being the government, the RBA and Australia’s banks. However, Credit Agricole “continue to think the RBA would prefer to wait until after seeing the budget (we do not think it will get any scoops) as well as further data to confirm the extent of the damage to growth done by the Victoria lockdown” before acting.


AUD: If analysts are proven right instead of money markets, we will likely see some upside in AUD (after all, if a cut is expected, then not cutting rates is almost akin to a rate hike, hence AUD will strengthen). However, if analysts are also right about a dovish shift in the tone of the bank (i.e. indication that stimulus is on the way soon), then this upside might be short lived. Conversely, if the RBA does cut rates as expected by money markets, AUD will likely only see minor downside, as this is mostly already priced in. 

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