Australian Dollar: Hawkish risk before RBA – Commerzbank

Volkmar Baur at Commerzbank expects the RBA to keep rates unchanged, in line with market pricing, but sees scope for a slightly hawkish tone given high petroleum prices and already reduced hike expectations. He argues the medium-term bias is for a rate cut and believes AUD will stay under pressure until markets fully price this outlook.

No move but guidance in focus

"Not a single analyst surveyed by Bloomberg expects a change in the cash target rate at tomorrow’s Reserve Bank of Australia (RBA) meeting, and the market has also priced in a 99% probability that the rate will remain unchanged. So I’m not exactly going out on a limb when I say that I, too, don’t expect any change tomorrow. However, tomorrow’s meeting doesn’t necessarily have to be as boring as it might sound at first glance."

"It should therefore be interesting to see how the central bankers interpret the diverging trends in the labor market and inflation. While inflation has surprised on the downside twice since the last meeting, the labor market has recently proven surprisingly robust once again. It should also be interesting to hear the central bank’s views on developments in the housing market."

"The persistently high prices for petroleum products are likely to make it difficult for the RBA to sound more dovish. Furthermore, the market has already priced out a lot of hawkishness regarding the RBA in recent weeks. By year-end, the market sees only a 60% chance of another rate hike now, after expecting almost 2 hikes at the end of April."

"This means that the probability of a slightly hawkish surprise tomorrow is likely to be higher. In the medium term, however, we continue to expect that the RBA’s next move will be a rate cut. And until the market reflects this, the AUD is likely to remain under pressure."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)