SPECIAL REPORT: Ahead of RBA November


*RBA expected to stay on hold
*Will local data plus global risks see RBA lean dovish?
*Markets to pay close attention to UMPT hints
*AUDUSD supported having broken double bottom neckline
 



When?

The RBA are scheduled to release their rate decision on TuesdayNov 5 at 2.30pm AEDT, a day that coincides with a public holiday in Victoria, the world famous Melbourne Cup - a race that stops the nation.
 

What to expect?

Markets widely expect no change from the RBA with the implied probability for a rate cut currently at 6%, or in other words, only 1.5bps of easing is priced in. We agree with market expectations given the recent spate of positive data to hit the wires which the likelihood of RBA easing take a sharp turn lower. 

2019_11_4-ASX-Rate-indicator.PNG
Source: ASX
 

A dovish lean likely

The RBA will take stock of local and global data that has come to pass since the October meeting in assessing whether it'll keep its dovish lean or edge towards neutral. While October has been an extremely positive month for global risks, those risks have not completely dissipated and only remain dormant. It's most likely however the RBA will keep its dovish lean, for now, seeing as one more rate cut out till Feb 2020 is still up for debate. It's also probably too soon to call a hawkish change given the dovishness of other G10 central banks. 
 

Local dynamics okay for now

In flagging key data points we think the RBA has paid close attention to before its Nov. rate cut decision, the September change in full-time employment (FTE) serves as the most impressive with FTE m/m reading +26.2k. Aussie inflation figures also showed marginal signs of improvement with Q3 y/y printing 1.7% in line with expectations, while housing prices appear to be picking up.

However, be mindful of August and September Aussie Retail Sales which have yet to indicate significant improvement in terms of willingness to spend, and therefore, disposable income. Because of the latter which partially offsets the strong labour data seen in October, we support a dovish lean with the Aussie central bank to stay data-dependent.
 

Unconventional Monetary Policy the next step

Since Gov. Lowe has acknowledged that "negative rates are extraordinary unlikely", we feel markets will be paying close attention to any hints around the potential future use of unconventional monetary policy tools (UMPT). That is, the problem of how to best stimulate the Aussie economy will need to be solved given the official Cash Target Rate is only three cuts off an effective lower bound of 0%. Some might argue the RBA only have one more cut left in them. A focus on the weak transmission mechanism of lower rates (i.e. banks aren't passing on full rate cuts to customers) could support the idea of some version of QE in the future.
 

Reaction

The widely anticipated hold should drive moderate AUDUSD price action depending on the lean. Looking at AUDUSD option pricing at time of writing, implied volatility suggests participants are betting on a one standard deviation move that could be as wide as ~60pips. Overall, however, we think AUDUSD is more likely to go higher than lower given recent dynamics. A break of the 200d-ma near 0.6954 could see price action make an attempt to complete a double bottom formation in the medium-term.

Current spot price: 0.6918 
Upside pivot levels: 0.6954 (+36pips), 0.7080 (+162pips)
Downside pivot levels: 0.6895 (-23pips), 0.6850 (-68pips), 0.6801 (-117pips)

2019_11_4-AUDUSD.PNG
AUDUSD. Source: ThinkMarkets

 



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