RBA set to maintain dovish stance amid China concerns

The Australian dollar will remain in focus in this first half of the week. We have already had some poor data on the housing market as building approvals slumped once again, and economists are not too optimistic on retail sales with the data scheduled to be released in the early hours of Tuesday, ahead of the Reserve Bank of Australia’s monetary meeting decision at 03:30 GMT.

Building Approvals in Australia fell 8.4% m/m in December compared to a rise of 2.1% expected. This comes on the back of a revised 9.8% drop the month before, which was likewise unexpected. The data points to weakness in the housing sector, suggesting there will be a drop in future construction activity. Obtaining government approval is among the first steps in constructing a new building. Meanwhile, retail sales are expected to have remained flat month-on-month in December after they rose by 0.4% the month before.

The RBA’s rate decision is likely to be a straight forward one, but it will still be interesting to see what the central bank says about the future of monetary policy. A recent Reuters poll suggests economists think the RBA will hold rates through to the third quarter of 2021. Only 6 participants expected a hike to come in March 2020 compared with 11 previously. We are also of the view the RBA will remain dovish and highlight concerns over China as a potential source of risk to the Australian economy. Domestically, though, we have seen an uptick in Aussie inflation data while employment figures have been coming in stronger in recent months.

Ahead of the RBA, the AUD/USD has come under a bit of pressure after its recent good run of form ended last week on the back of stronger US jobs and manufacturing data on Friday. The Aussie has found additional resistance from its 200-day moving average around 0.7250. But despite its weakness, the technical bias would only turn bearish in the short-term upon a clean break below the most recent low near 0.7150.

Source: TradingView and FOREX.com.

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