RBA July Policy Meeting Preview

WHEN

2 July 2013, 00:30 EST

RBA LIKELY TO STAY ON HOLD

The consensus is that the Reserve Bank of Australia will keep its cash rate at 2.75% at its July policy meeting. While no change may support the Aussie-dollar, a lot will depend on the RBA’s post-meeting statement.

It is likely that the central bank will maintain an easing bias, possibly suggesting that a rate cut could come in August if July’s inflation reading is towards the lower end of the RBA’s 2%-3% target range.

But there doesn’t seem to be a need to ease this month: inflation looks stable, with CPI coming in at 2.4% for May and June. And Australian manufacturing put in a good performance in June, buoyed by low rates and a sliding Aussie. Indeed, the market only seems to be pricing in a 20% chance of a 25bps cut.

Moody’s also announced yesterday that the outlook for Australia’s Aaa rating remains stable. The ratings agency said “the ratings are based on the country’s very high economic resiliency, very high government financial strength, and very low susceptibility to event risk.”

END OF THE COMMODITIES SUPERCYCLE

Fed chairman Ben Bernanke’s now infamous comments made a couple of weeks ago have rattled global markets. But the Aussie’s descent began many weeks ago. On a trade-weighted basis, the Aussie-dollar has now shed 11% in the last two months.

And as global commodity prices ease, the Aussie has fallen from the $1.05 level in April, and currently lurks beneath $0.92 at near three-year lows. The Aussie-dollar’s slide has, to some extent, given a helping hand to the RBA, mitigating the need for it to take immediate policy action.

But as the global commodities super cycle comes to an end, Australia desperately needs to realign its economy away from a commodities focus. “[Australia] must continue to diversify [its] economy, not to have all our eggs in one basket,” said prime minister Rudd last week.

There is a sense that the RBA is looking to the property sector to spur building and construction. But for these sectors to provide any sustained support, rates may need to fall lower.

THE CHINA ANGLE

Domestically, many column inches have been filled by the ousting of former prime minister Julia Gillard by Kevin Rudd. But it is unlikely to feature too heavily in the RBA’s thinking. The RBA will, however, be keeping an eye on developments in China; weaker Chinese manufacturing PMI data pushed the Aussie down to $0.9110 on Monday morning.

“The RBA this week should cast an increasingly dovish backdrop given recent credit crunch concerns out of China,” says Chris Vecchio, a currency strategist at Daily FX. Recently, a slew of analysts slashed their growth forecasts for China. Goldman Sachs revised its 2013 Chinese growth estimate to 7.4%, while Credit Suisse were more bearish, now forecasting growth in 2013 of 6%, despite official Chinese forecasts penning in 7.5% growth.

Slowing Chinese commodity demand will inevitably weigh on the Australian economy. And further slowing in the world’s second largest economy is likely to be Aussie-negative.

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