RBA Rate Decision: What to Expect for the AUD

The Reserve Bank of Australia has a monetary policy announcement this evening and even though interest rates are not expected to be changed, the tone of the statement could seal the fate of the Aussie by determining whether it makes a run for 1.05 or falls back towards parity. The key with the RBA is to look for comments related to the terms of trade and the Aussie.

If the RBA emphasizes the negative impact of a strong currency over the positive implications of higher commodity prices to the terms of trade, the AUD/USD could give up its gains. If they emphasize the terms of trade and doesn’t even mention the currency (which would be unlikely), then it could be clear sailing to 1.05. The most likely scenario however is that they attempt to temper their positive outlook by discussing the risks posed by a strong currency which should help the A$ in the medium term but probably hurt it in the short term.

Here are the levels to watch in the AUD/USD:

The Australian dollar has come a very long way over a very short period of time. Since the middle of March, the AUD/USD has appreciated more than 7 percent to a record high of 1.04168. The big question for the central bank this evening is whether the recent gains in the Aussie sufficiently mitigated inflationary pressures and how it has affected export demand. Like the Australian dollar, commodity prices have performed very well in recent weeks, which helps to support the metal and mining industry and there is a good chance that this will have a bigger impact on the Australian economy than the strong Aussie. If the gains in the A$ have not deterred other countries from buying Australian commodities, the RBA will probably acknowledge that the outlook for investment and terms of trade has improved. Consumer spending has been a big concern for the RBA, but retail sales have slowly creeped higher which could build the case for a rate hike. The labor market has also remained strong but with the Australian dollar trading at a record high, the RBA may want to be very careful about saying anything that could push the currency even higher. No export centric economy wants a strong currency.

aud/usd Australian Dollar Kathy Lien Reserve Bank of Australia

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