RBA Preview: Beware Of Doves, Leaks And Stop Hunts

In addition to the Chinese Caixin Manufacturing PMI due out shortly, which will either confirm or deny Sunday's modest decline in the official Mfg PMI, the Reserve Bank of Australia’s (RBA) decision (due at 2:30pm Sydney time) headlines the region’s risk events this week.

All of those surveyed expect the RBA to stand pat, which would leave its cash rate sitting at 1.50%. The minutes from the July meeting reaffirmed labor and housing markets as particular areas of interest, with both leaving many questions unanswered. The most interesting note to take from the minutes was the discussion surrounding the neutral interest rate, which some market participants deemed as hawkish, and which sent the AUD surging. However, in his most recent address last week, RBA Governor Lowe turned unexpectedly dovish and rejected this view, with Westpac suggesting that he reinforced the Bank’s ‘firmly on hold’ stance. Lowe also tried to talk down the currency, stating that it "would be better if the AUD was a bit lower".

This was underscores by last week's sub-consensus headline 2Q CPI print (0.2% QoQ vs. 0.4% expected) which supports the RBA's view that domestic inflationary pressures are lacklustre, but officials may take some comfort in the slightly firmer core readings, according to analysts at ING.

Despite rhetoric from Lowe and his deputy Guy Debelle the AUD has continued to rally, so any language pertaining to the domestic currency will be closely scrutinized. Heading into the announcement, the Australian dollar has been rising amid concerns the RBA may talk down a currency that’s trading near the highest level in more than two years. At pixel time, AUDUSD trades back above 0.80, rising as high as 0.802 with the next resistance the July 27 high of 0.8066, a level unseen since May 2015.

As RBC adds, while there is some risk the RBA is forced to nudge its near-term growth forecasts lower, the longer-term profile is still likely to show an expectation of a return to above-trend growth and within-target inflation. Its confidence around these forecasts has likely increased given recent data on the global and domestic economies, though the bank adds that it "still expects the message to remain clear enough that rates are unlikely to move in either direction for some time yet."

On Friday, the RBA's Statement on Monetary policy (SoMP) will supplement the decision. No material revisions are foreseen within the economic projections.

In terms of the bigger picture, RanSquawk points out that ANZ posit Lowe’s most recent rhetoric suggests that “financial stability seems to rule out further rate cuts. This is not necessarily the case, in our view. Importantly the current choice is against the backdrop of an expected improvement in the economy. Should this improvement falter then the trade-offs facing the RBA will change significantly.

In other words, while immediate upside in the pair may be capped, a strong emphasis on the recent dovish rhetoric could send the AUDUSD plunging. Should stops be taken out to the downside, the pair could plunge as much as 150 pips according to some.

FX traders will want to keep a close eye on sharp AUDUSD moves seconds before the announcement: on at least one occasion, most famously in April 2015, the RBA statement was leaked in advance, with the entire currency move taking place roughly 7 seconds before the official release.

h/t RanSquawk