Australia’s central bank’s (RBA) first policy meeting of the year is not opening in the best conditions. Unpleasant news from both home and foreign markets are weighing on the economy while optimism on growth is fading. Despite repeated intentions to raise its cash rate (currently at 1.50%), unchanged since August 2016, it appears investors are pricing in a change in the other direction.
Currently trading at 0.7225, AUD/USD (+2.50%) is expected to head along 0.7220. We advocate a long position following tomorrow’s meeting.
In addition to a sharp drop in Chinese demand, which accounts for more than 40% of total exports in the country, Australia is facing direct consequences, starting with a slowdown in Q4 2018 inflation data, largely below RBA’s target of 2–3% while the hardest downturn remains for the property market. Building approvals are being given at a decade-low level, amid falling prices and tighter credit conditions. A positive signal remains in a vivid labour market.
How dovish the RBA will be during Tuesday’s monetary policy meeting? Will it lower its key rate? Risk is balanced, since the economy remains stable, thus favouring an unchanged rate.
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By Vincent Mivelaz