will the rba be stirred by recent events 1165142015

The Reserve Bank of Australia (RBA) is widely expected to leave the official cash rate at 2.00% at its policy meeting on Tuesday, ahead of the release of growth figures on Wednesday. There have been some whispers in the market that a deteriorating economic outlook for China and the extreme volatility in its stock markets may be enough to push the RBA into a more dovish stance, but we don’t’ expect it to respond to these short-term fluctuations, unless they become more of a long-term issue.

Domestically, the Australian economy continues to grow below-trend and there’s still a lot of uncertainty surrounding key parts of the economy. The unemployment rate remains high, although there are bright spots in the labour market, and inflation remains at the base of the RBA’s target range. Furthermore, Q2’s private capital expenditure report wasn’t horrible, but it highlights a persistent problem in Australia as it loses its main source of economic growth.

Australian private capital expenditure fell a seasonally adjusted 4.0% in Q2, and the main contributor to softening spending levels remains the mining sector, with estimate 3 for 2015-2016 for mining dropping 37.1% since the same estimate for 2014-2015. Furthermore, Buildings and structures fell 5.6% and equipment, plant and machinery dropped 1.2% last quarter. Since the same period last year total new CAPEX has fallen a disheartening 10.5%, led by a 16.7% decline in building and structure spending over the same period. However, there was a bright spot in the report, with other selected industries, which rose 17.2%, contributing to a 10% rise in estimate 3 for 2015-2016, from estimate 2.

The tentative signs of life in non-mining sectors of the economy are being accompanied by generally mixed economic data. In July, the unemployment rate jumped to 6.3% from a revised 6.1%, although this was accompanied by an encouraging increase in full-time employment and the labour force participation rate. However, business confidence plummeted in July, with NAB’s Business Confidence Index falling to 4 from a revised 8 (prior 10), and an uptick in business confidence was partly responsible for the removal of the RBA’s easing bias in August.

Market reaction

While no one is really expecting the bank to cut interest rates tomorrow – all 25 economists surveyed by Bloomberg and the vast majority of the market don’t expect any interest rate action tomorrow – there’s a chance it could reintroduce its dovish bias, if not tomorrow then at coming meetings, in response to the aforementioned soft economic data and weak global inflation outlook.

A reintroduction of a dovish bias by the RBA would likely hit the aussie hard, adding to recent weakness in the exchange rate. However, if the bank remains relaxed on the sidelines, AUD may see a short-term relief rally. The recent risk-off attitude in the market has hit the commodity-backed aussie hard, with AUDUSD and AUDJPY slumping to multi-year lows, which has created some room for consolidation; both pairs are looking a little oversold.