Here is a preview of the Reserve Bank of Australia (RBA) announcement and accompanying statement for the monetary policy board meeting today. It is a rather long post as it includes bank analyst expectations as well as a discussion of what is perhaps even more important for the Australian dollar market this week, the Q2 GDP data due on Wednesday.

The RBA will have the Q2 GDP data in front of them today at the meeting … the language used in today’s accompanying statement should be reflective of how strong (or not) the GDP result is. IMO this gives the biggest scope for a surprise in the accompanying statement, even though analysts are tending to think there won’t be too much in it (read on …)

In brief:

  • No change to the official cash rate target. Its at 2.5%, it has been for more than a year and will remain there today. if you are thinking the market is all one way and we might get a surprise, don’t. That would be a waste of energy. Go and have a cup of tea and a lie down. (Sorry, take that as a piece of light-hearted banter, not a lecture. Seriously … no change today).

Attention will turn to the accompanying statement:

  • Data flow recently has been mixed, but has tended to be supportive, on the whole, of the ‘transition’ in the economy from mining investment to other growth in other sectors. There is still a huge drop off in mining investment to come down the track, and is indeed in progress at present, but the rest of the economy is stumbling along. Indeed, a recent survey shows all responding economists expect the next move from the RBA will be a hike. It’s a way off down the track, but there you go.
  • In the accompanying statement the RBA will most likely repeat that the most prudent course is likely to be a period of stability in interest rates
  • On the currency, there may be some bemoaning of its current strength, but I don’t expect we’ll get much new language on it. Maybe the RBA eyes are looking over the Tasman Sea (to New Zealand) to get some tips on talking the currency down.

OK, so here are some bank analyst expectations, starting with views for today and then on to some thoughts on the Q2 GDP and more …

Boldings are mine …

Citi FX Head of G10 Strategy for Asia Ex-Japan Todd Elmer:

  • Look for recent Aussie resilience to continue on the crosses,
  • But not against the US dollar where overall they see a bigger trend
  • Says those looking “for stronger RBA opposition to the level of the exchange rate will be disappointed”
  • Despite being “‘overvalued’ by many measures”…”this resilience looks increasingly out of sync with statements from policymakers”
  • “The Stevens testimony suggested that a shift in underlying policy to counter AUD appreciation is more remote than investors had been pricing in and, further, he appeared to downplay the role of the exchange rate in promoting economic adjustment”
  • “We believe it is unlikely that tomorrow’s statement will see new language on FX. No news should be good news as the perceived tail risk of stronger rhetoric is removed.”

NAB:

  • The RBA is … almost certain to repeat that “On present indications, the most prudent course is likely to be a period of stability in interest rates.”
  • Of course, this prudent course remains a balancing act between an $A that is too high for their liking and interest rates that are too low. They’d prefer a different mix for sure.
  • NAB still sees the RBA staying on hold as they wait for the mix of forces on the economy to resolve – this could take some time. We have also been warning that if the RBA need to do anything in the next year it is more likely to be a cut.
  • On balance, recent developments have reduced the risk they may need to cut again and language tweaks in Tuesday’s Statement should reflect this.

ANZ:

  • In our view, the RBA is also likely to be encouraged by the further improvement in non-mining investment intentions but is likely to want to see more concrete evidence of an entrenched non-mining recovery before it begins to think about lifting the cash rate.
  • The RBA’s post board meeting statement is likely to note the upgrade to non-mining firms’ investment intentions from this week’s CAPEX report.
  • Apart from this, we expect the post meeting statement, as well as RBA governor Stevens’ speech on Wednesday to provide few surprises, given that we have heard from the RBA a number of times in recent weeks.

OK, on to thoughts on Q2 GDP, for release on Wednesday and, arguably, more important than the RBA meeting today. (Oh, and as a ps. … the RBA will already have the GDP result in front of them today … us mortals will have to wait until Wednesday … but language in the accompanying statement should give us a clue):

UBS:

  • Halved their Q2 GDP forecast to +0.3% q/q last week
  • Maintaining that forecast following the release of business indicators data but concede there is ‘modest’ upside risk
  • The rebound in inventories (data from Monday, here) could add 1.0 points to Q2 growth … “We continue to forecast 0.3% for Q2 (q/q GDP), but now see some modest upside risk, as the weakness in demand and inventory build appears concentrated outside the domestic economy”

ANZ

  • Also see upside risk to their +0.4% q/q forecast for Q2 GDP
  • The rise in inventories could add 1.0 points to Q2 GDP (see already referred to link for the inventories data)

CITI:

  • Their forecast for Q2 GDP is at 0.4% q/q
  • They say the rise in inventories (from a fall the previous quarter) would add around 0.8 points to Q2 GDP, which would help to almost offset the expected large detraction from net exports
  • Looking ahead …scope for more inventory rebuilding (they remain relatively lean) … could rise if demand picks up

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OK, and finally … the trade data today will also be an input to the Q2 GDP. That data is due out at 0130GMT. Any topside surprise there could well be indicative of an even stronger Q2 GDP result … if so you can expect that to be reflected in the RBA’s language today.