RBA Preview

Analysts can't agree on how much the RBA will raise rates, but the market is likely looking beyond the next meeting to an ever more uncertain rate trajectory.

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What's at stake

Governor Lowe intimated that only a 25 or 50bps hike will be considered at this meeting. The latest survey of Australian economists shows that 63% think it will be 50bps. The dissenters are pointing to two consecutive 25bps point hikes, one at this meeting and one next. So, in general, economists pretty much agree on where interest rates are headed in the near term, with the disagreement merely a matter of timing.

The series of worrying economic data, in particular low labor participation rate and lagging wages, has some economists questioning whether the RBA will keep tightening. After all, other central banks lifted rates sooner and faster than the RBA and are now looking at a potential recession. With inflation expected to peak at 7.0%, attention is focusing on what is coming next.

What to look out for

Because there is a strong consensus on rates rising over the next couple of months, what might be more relevant to markets is Governor Lowe's post-event press conference. The main point is likely to see whether the RBA is starting to hesitate given the latest economic figures.

Naturally, the RBA is expected to prioritize monetary stability over economic growth. Particularly when inflation itself can be a hindrance to the economy. Lowe might signal this during the presser, suggesting that the RBA will be focusing more on price stability. On the other hand, if he expresses concern about the economic situation, and specifically the rising cost of mortgages, that might be interpreted by the market that the RBA won't be as aggressive in raising rates as currently expected.

Aussie at critical trendline support

Aussie fell to a 25-month low last week where it found (temporary?) support at the 50% Fibonacci retracement of the $0.5510-$0.8000 leg. It trades marginally above the said level of $0.6765, around $0.6830, but it could downswing lower to $0.6675 if the multiyear support weakens. Below there, the September 2018 support of $0.6675 could act as interim support above the golden ratio of $0.6465.

Fortunately, we can observe trendline support within the topical trading zone, stoking up the critical Fibonacci retracement. However, last week marked the fifth time the trendline has rejected prices at lower lows, and often, the sixth is a breakout. If so, AUDUSD could bounce in the near term, and run for the 38.2% Fibonacci at $0.7055 assisted by the RSI divergence. Before that, bulls need to recapture the swing resistance of $0.6985. Last week’s open at $0.6930 may be the catalyst for bulls.

Source: Spreadex trading platform

Key takeaways

Most analysts believe the RBA will hike interest rates by 50bps, but due to a batch of rough economic data hinting at recession, two consecutive 25bps hikes are also probable.

Investors and traders alike will want to pay attention to Governor Lowe's post-event press conference and whether he focuses more on price stability over rising costs.