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Australian Dollar May Look Past RBA, Focus on Fed Rate Decision

Australian Dollar May Look Past RBA, Focus on Fed Rate Decision

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • RBA likely to keep monetary policy status quo in place
  • AUD/USD looks to FOMC statement for direction cues
  • Aussie, gold price correlation does not imply causation

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The Reserve Bank of Australia looks likely to keep the setting of monetary policy unchanged when May's rate decision is unveiled. While headline inflation has undeniably recovered in recent quarters, much of that can be attributed to stabilizing crude oil prices rather than domestic factors. Balancing this with a still-uncertain US rates path - a formative consideration for global borrowing costs at large - Governor Philip Lowe and company will probably opt to remain in wait-and-see mode.

The Fed's own policy decision later in the week may be far more significant. While the rate-setting FOMC committee is not expected to issue a rate hike this time around, the tone of the statement accompanying the announcement will be closely scrutinized. US economic growth stumbled in the first quarter and traders will want to know to what extent this may derail the US central bank's prior plan for three rate hikes in 2017. A worried-sounding statement may thus boost the Aussie while a cheerful one that downplays recent weakness might hurt it.

A frequently observed correlation between gold prices and the Australian unit is often misunderstood as implying that the yellow metal's movements influence the currency. It is important to remember that while studying cross-market correlations can be profoundly illuminating, they in no way imply causation. Rather, both the Aussie Dollar and gold often reflect analogous responses to broader themes. Frequently, that macro consideration is the expected path of Fed monetary policy.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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