The RBA is expected to leave the rates unchanged. A vast majority of economists thinks so, and so do market: there is a chance of only 16% for cutting the rates below the historic low of 3%.
However, there are some arguments supporting a cut. In case of a surprising move, AUD/USD could plunge and even test parity. So, here 5 arguments that support the cut:
Update: The RBA refrained from a rate cut, but left the door open for future cuts. The Aussie recovered.
- Housing sector: Australia’s housing sector is still looking for a direction. Fresh building approvals data disappointed and send the pair below 1.0150. A rise was expected but a drop of 2.4% was recorded.
- Capital expenditure: The recent quarterly report showed a drop of 1.1% while a rise was expected. This forward looking figure is watched by the RBA.
- Chinese signs of slowdown: The economic giant had a nice ending to 2012, but the recent PMIs for the manufacturing sector were weaker than expected. Australia’s No. 1 trade partner is China.
- High rate: In the post 2008 crisis world, having a 3% interest rate in the Western world really stands out. This draws some speculative money, and isn’t always desired. The RBA could move towards rates in other countries, especially as inflation is low.
- Currency wars: A rate cut could weaken the Aussie, a desired outcome for Australian exports. The RBA would never say that it is acting to weaken the A$, but it can certainly complain about the exchange rate, as it has done in the past, and as other policymakers often do.
It’s important to remember that the Australian economy is doing very well: unemployment is low and the standard of living is high. However, the direction of the economy and predictions about future directions have an impact.
If the RBA doesn’t cut, the focus will shift to the statement. A dovish statement could also weigh on the Aussie. Some of the arguments above could be used in the statement.
This is a very big event for AUD/USD, but certainly not the only one. Q4 GDP will be released afterwards. See how to trade the Australian GDP with AUD/USD.
And for a technical analysis and full outlook for the Aussie, see the AUD/USD weekly forecast.