RBA March preview and what comes next for AUD/USD?

[MongiIG]

Economists surveyed by Bloomberg expect the RBA to lift rates by 25bp to 3.60%; the main interest will be the forward guidance in the accompanying statement.

 

Source: Bloomberg

 

Indices Inflation Interest rates Reserve Bank of Australia Unemployment Economics

 Tony Sycamore | Market Analyst, Australia | Publication date: Monday 06 March 2023 

The RBA commenced the current rate hiking cycle in May last year to tame spiralling inflation and to cool a tight labour market. Since then, the RBA has delivered a cumulative 325 basis points of rate hikes, including four consecutive 50bp rate rises between July and September.

RBA release date

The Reserve Bank Board of Australia is scheduled to meet on Tuesday, March 7 at 2.30 pm Sydney time.

What is "expected?"

At its February Board Meeting and following the release of hotter-than-expected December quarter inflation data, the RBA delivered a 25bp rate hike in conjunction with a hawkish shift as it warned that further interest rate increases were needed over the months ahead.

"The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary."

The RBA also noted that if inflation were allowed to "become entrenched in people's expectations, it would be very costly to reduce later."

The hawkish messaging from the Board Meeting was then reiterated by RBA Governor Lowe at an appearance before the Senate and House Economics committee in mid-February.

The Australian interest rates market is almost fully priced for a 25bp rate hike this week, and at least two more rate hikes this year, with the RBA's peak rate now at 4.2% (see chart below).

 

Source: RBA

Since the February Board Meeting, some preliminary signs have emerged that the economy is slowing, including softer wages, GDP, and unemployment data.

Unfortunately, the RBA is unlikely to deviate from its new (hawkish) path until it sees evidence that inflation has begun to ease, possibly in the Q1 2023 inflation numbers released at the end of April.

As a result, our base case is that the RBA's statement on Tuesday will look and sound very similar to the one in February. However, if the words “increases” and “months” were missing, it may allow a more dovish tone to emanate from the statement.

 

Source: ASX

How will the AUD/USD react?

The delivery of a hawkish 25bp rate hike by the RBA on Tuesday (our base case) is likely fully priced into the AUD/USD, which ended last week 0.63% higher at .6794 after testing and holding support at .6700c.

Last week's rebound was supported by upside surprises in China's PMI data which revived China's re-opening trade after it flagged in February.

Technically we continue to view the decline in the AUD/USD from the Feb .7157 high as a correction or countertrend. Providing the AUD/USD continues to hold above support at .6700/80, we think the correction is close to completion, and a positive bias is in place, looking for a retest of .7157.

Our positive bias would increase in conviction if the AUD/USD holds above support at .6700/80 and then recovers above the 200-day moving average at .6800/20.

AUD/USD daily chart

 

 

Source: TradingView