The RBA interest rate decision is coming up at 0330 GMT (2:30 pm in Sydney).
The final big data point before the decision was a huge miss on December retail sales, suggesting consumers locked themselves down with omicron spreading. Sales fell 4.4% compared to a rise of 3.9% expected.
The RBA had surely already made its decisions before the data but that report could temper Lowe's comments in a speech 22 hours after the decision at the National Press Club in Sydney.
The main decision is barely up for debate. There's an overwhelming likelihood that the Cash Rate will stay at 0.10%, where it's been since the start of the pandemic.
What's changed is how quickly Lowe will need to raise rates and what he may want to signal now. The market is now partly pricing in a hike in May, in large part due to recent data showing inflation rising 3.5% y/y in December with core prices up 2.6%. The RBA had not expected core inflation to hit 2.5% until late 2023.
Within the report, the 1.0% m/m rise in core inflation was far above the 0.7% expected and the broad spread was a surprise.
There's clearly a re-think that needs to be done on rates but the market is struggling with what to do with the Australian dollar. It's teetering on the edge of an ugly breakdown against the US dollar. It touched a 20-month low below two major bottoms on Friday but has gotten a stay of execution from a better risk trade so far this week.
If that drop is to be a false breakdown then it will take some help from the RBA. One thing they might be watching is housing. In the recent inflation report, the ABS noted high levels of construction building and a climb in home prices. Today's data on housing finance showed owner-occupied home finance up 5.3% m/m in December after a 7.6% rise the month before. Australian house prices rose 21.3% y/y in January, according to CoreLogic.
In terms of the mechanics of the event, there's little doubt that the RBA will cease QE, so that shouldn't be a market mover.
What's up for debate is how quickly and how much the RBA will hike. The market is priced for a rise to at least 1.00% at year end while economists are more dovish.
In terms of timing, the rates market sees a 14% chance of a 15 bps hike as soon as March. If that's where the RBA wants to go, they will need to start signaling it now.
An end to QE shouldn't surprise anyone but if there are no hawkish messages with it, there will be at least slight disappointment in AUD. If they repeat messaging about not being 'pre-emptive' the fall will be more dramatic. That could be coupled with an emphasis on how the global inflationary picture isn't necessarily relevant to Australia.
A hawkish surprise would be messaging that they could hike 'soon' (with the usual caveats). The statement could emphasize growing inflation risks with a nod to wages and housing.
In terms of trading, I would much rather buy a hawkish message than sell a wishy-washy dovish one. The broader shift in risk appetite today underscores a growing likelihood that we've seen a false break. Combine that with a hawkish RBA and we could see a snap higher, punishing recent shorts in the same way they've been punished in stocks.