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The Reserve Bank of Australia (RBA) will announce its decision on rates Tuesday at 04:30 GMT. As the Bank is almost certain not to change its policy, price developments will be dictated by any changes in the wording of the accompanying statement. Recent price measures suggest that investors anticipate a more cautious attitude. This implies that the risks surrounding the Aussie reaction may be asymmetrical, with the expected expected tone leading to a modest decline, but a more neutral bias potentially triggering a major recovery in relief.
The RBA will have a difficult balance in his hands when he meets tomorrow. On the one hand, the Australian domestic economy is buzzing well. Economic growth was stronger than expected in the first quarter, the labor market continued to record slow but steady gains in recent months, and the exchange rate dropped significantly, making Australian exports more competitive. In addition, housing prices began to decline, easing fears of financial risks and badet bubbles related to low interest rates.
On the other hand, international developments and especially commercial frictions present downside risks. The stalemate between the US and China has intensified lately, and if the situation were to deteriorate further, Australia would probably be among the first nations to be caught between two fires. Not only because of its heavy dependence on commodity exports, which would be hard hit in the event of a trade war, but also because of its deep economic ties with China. Then there is the issue of rising US interest rates. Although the RBA is maintaining its own policy unchanged, rising US borrowing costs are leading to slightly higher rates for Australian banks, costs that will be pbaded on to consumers soon. This is particularly worrisome as Australian households are already heavily indebted and could therefore face higher rates.
The question is how the Bank will manage these uncertainties. Will he be more concerned, as did the RBNZ last week, or will he maintain his wait-and-see neutral attitude? Judging by recent price measures, markets seem to be preparing for the previous scenario. The Aussie / dollar is trading near a 18-month low pending decision on rates, while any speculation surviving for a short-term increase in the RBA's rate has evaporated . At the time of writing this report, Australia's EIS did not indicate a higher probability of a rate hike this year, but instead suggested a low probability of rate cuts.
This has two implications. First of all, if the Bank seems indeed cautious, as investors seem to anticipate, the negative reaction from the Aussie could be relatively modest, as we are already expecting that this is already the case. Secondly, anything that is not an accommodative attitude could be a surprise to the market, which could result in a significant rebound in Australian currency
Technically, looking at the l? Aussie / dollar, further declines could Immediate support is approaching the 18-month low of 0.7323, with a bearish break bringing attention to the 0.7250 area, defined by the domestic rebound of December 30, 2016. Even lower, the declines could stagnate to 0.7155, December 28, 2016 Conversely, if the Bank is less accommodating than investors think, the resistance to advances could be around 0, 7445, the highest on June 25. If the bulls pierce, the eyes will turn to the territory of 0.7495, marked by the in, the lowest of May 29th. Even higher, the area around 0.7675 could provide resistance.
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