Australian Dollar: Why an RBA Rate Hike Will Likely Turn Out Bearish

For the uninitiated or uninformed currency trader, the upcoming rate decision may seem a clear point of strength for the Aussie that can perhaps revive its lost strength. However, there are few circumstances under which this event will turn out bullish for the currency. At the last policy meeting, the policy officials raised the benchmark lending rate 25 basis points to 3.75 percent. This was an extraordinary event because the global economy is generally struggling to get back on its feet and the policy authority had never before hiked at three consecutive meetings. This time around, the tally is up to an unprecedented four consecutive hikes (economists are calling for another quarter point hike and the market is pricing in a 67 percent probability of the same); and yet domestic data has actually cooled and the global economy is in no better condition. With China taking steps to cool its growth, a major trade partner is in effect pinching off a vital artery of growth. Furthermore, the commentary that accompanied the last rate decision was clearly laying the path for a more reserved policy approach going forward. Altogether there are a few scenarios that can come out of this event. If the bank does hike to 4.00 percent, they will most likely further indicate that a pause is up next. Since one more hike is priced in, this will kill speculation going beyond. If they hold (a considerable probability), the Aussie dollar’s declines will be further fueled. Only a hike and commentary that leaves the door open to a follow up hike at the next meeting will be deemed bullish.

Outside the pull of the rate decision there is plenty of market moving economic data. In the lead up to the event, both the TD Securities consumer inflation report and government housing price pressure gauge will be used to gauge the probability of a hike. After the event, the RBA will release its Quarterly Monetary Policy Statement. Any uncertainty after the rate decision about the timing of further policy adjustments will be laid to rest with this report. As for economic activity, the retail sales, trade balance and business confidence report will offer a broad view of the entire economy. - JK