AUD/USD could fall if RBA acknowledges worsening conditions

• The RBA reconvenes after the summer break, and the world has changed since early December.
• No change is likely, but a more dovish tone is undoubtedly possible.
• The recent Fed-fueled rally means a negative tone is not priced in.

The Reserve Bank of Australia announces its decision on Tuesday, February 5th, at 3:30 GMT. The RBA convenes 11 times a year, with a summer break in January. The vacation makes the February decision more critical.

The Canberra-based institution last changed its policy back in August 2016 and had left the Cash Rate unchanged at 1.50% since then.

While no change is expected now, the RBA has lots of data to chew on and acknowledgment of the downturn may weigh on the Aussie.

A global and local slowdown

The Australian economy has substantially slowed down. It grew by only 0.3% q/q in the third quarter of 2018, coming off a robust rise of 0.9% in Q2. And it’s not just the domestic economy that is worrisome

China, Australia’s No. 1 trading partner, has been grabbing the economic headlines for the wrong reasons. 2018 saw the slowest growth since 1990, producer prices are down, and so industrial output. Australia exports metals to China’s industry.

Australia is coming off a long-term housing boom. Prices in Sydney and Melbourne are no longer rising quickly, to say the least. The fresh Building Approvals report showed a plunge of 8.4% in December, coming on top of a dive of 9.8% in November. While the indicator is notorious for its volatility, the consecutive drops point to a worrying trend.

And while headline inflation rose by 0.5% q/q in Q4, the Trimmed Mean, or core inflation, rose by only 0.4%, for the second consecutive quarter, pointing to sub 2% annual growth.

Not all is bad in the Australian economy. Similar to the US, employment continues rising. The latest report for December showed an increase of 21.6K positions, not only better than expected but coming on top of an upwards revision of November’s increase to 39K. Moreover, the unemployment rate surprisingly dropped to 5%.

However, labor usually lags behind other parts of the economy. Housing tends to lead, GDP follows, and labor comes last. This is relevant in the good times and also in the bad times.

RBA more dovish

The Bank has been strictly neutral for many months. When pressed, Governor Phillip Lowe and his colleagues said that the next move is more likely to be up rather than down in interest rates.

This may change now. 

The RBA may want to be ahead of the curve and send a signal that it is ready to cut interest rates. Such a move would push the Aussie lower, thus boosting exports.

A cut may also be needed to support the housing sector. Apart from the aforementioned drops in prices and building consents, some commercial banks have raised their mortgage rates of late. A willingness to ease by the central bank may put pressure on those banks to reconsider.

AUD/USD – a dovish twist is not priced in

Aussie/USD gained very nicely on the dovish Fed decision. The move away from raising rates to patience boded well for risk sentiment and the A$, a risk currency, undoubtedly took advantage of the Fed´s dovish twist

The currency pair already began moving beforehand, drifting away from the danger zone of 0.70.

It seems that markets are not pricing in any significant statement from the RBA. Some analysts see the monthly meeting as a non-event.

After two months without hearing from the RBA, and with darkening clouds at home and abroad, Lowe and co. can take the Aussie down under.