In all likelihood, the Reserve Bank of Australia will keep interest rates at record lows once again on Tuesday at 0330 GMT as the Bank is still monitoring slow progress in household income. A day later, GDP growth figures for the third quarter will come into the light (0030 GMT) but analysts do not see expansion picking up speed, justifying somewhat the RBA’s cautious stance.
The RBA chief, Philip Lowe, believes that higher interest rates require higher wage growth for consumers to afford increased costs at a time when the country’s household debt to GDP ratio is the second highest in the world. While some improvement has been captured, with wages rising by 2.3% y/y in the third quarter versus 2.1% in Q2, this was not enough to boost consumption, with retail sales printing a softer increase of 0.2% q/q in the same period compared to 1.0% seen previously, the strongest pace registered in a year. CPI figures were a weak spot as well, returning to 1.9% after jumping marginally above the RBA’s 2.0% price target, a sign that inflation pressures are not building up as efficiently as policymakers wish.
On the supply front, expansion in business inventories – a key component in GDP growth calculations – vanished in Q3, falling from 0.7% to 0.0%, while private expenditures on new capital held in negative territory for the second quarter, with declining housing prices adding to the gloomy business picture. Yet the depreciating aussie which fluctuated near 2 ½ -year lows in Q3 against the US dollar undoubtedly provided some relief to exporters who saw foreign demand for their products heating up substantially in August and September. But the ongoing trade war between the US and China, Australia’s biggest export partner continues to worry Australian businesses, especially after Chinese GDP growth appeared at its lowest in 10 years, flagging that China might turn more careful regarding its overseas purchases in the near term. It is also worth mentioning that iron ore, which holds the biggest share in Australian exports, came under severe sell-off lately.
Taking the above evidence into account, a slowdown in GDP growth from 3.4% y/y to 3.3% is possible as forecasts suggest and hence RBA policymakers may unanimously vote to hold cash rates at the record low of 1.5% for the 27th consecutive month. Even if markets are completely certain about the latter, investors will still go through the statement accompanying the rate announcement to identify adjustments in the forward guidance. Recall that in the previous policy meeting policymakers remained positive that the next move in interest rates will be up and that the labour market will keep tightening, pushing wage growth and thus inflation higher.
If the rate statement paints surprisingly a less encouraging view on how the economy and therefore monetary policy will evolve in the future then AUD/USD might take a downturn, falling probably as low as 0.7340. A break of that barrier could see additional support between 0.7300-0.7280 before the focus shifts down to the 0.7200 round level. Negative momentum could strengthen even further if Wednesday’s GDP growth readings miss expectations.
Alternatively, if the Bank communicates in a more positive way, AUD/USD could extend gains towards the 0.7400 mark. Above that level, resistance could appear around 0.7460, a frequently tested region in the past, while steeper increases may also touch the 0.7500 psychological level.
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