RBA Preview: Hawks May Boost AUD

A hawkish shift in rhetoric from the Reserve Bank of Australia may propel the Australian dollar to a fresh record high when the RBA delivers a rate decision at 0430 GMT. While most economists expect rates to remain at 4.75%, there is a considerable chance of a surprise hike after last weeks reading on Q2 CPI exceeded expectations. A more likely outcome is that the RBA signals future rate hikes, something that will also fuel AUD gains. Also see the link to NEW PREMIUM TRADES on EURUSD, USDJPY, EURGBP, S&P500 and US crude

We held the opinion the RBA would remain on hold in the coming months until the most recent RBA minutes and last weeks CPI. These reports suggest the next move from the RBA will be a hike. It probably wont come today but a hawkish statement should boost AUD around two cents in the days ahead.

The current mildly restrictive stance of monetary policy remained appropriate, has been the refrain from the RBA in recent meetings but the central bank is now likely to take a more hawkish bent after headline CPI climbed to 3.6% y/y from 3.3% y/y. Prior to the data, the RBA said the figures would be important in shaping views on rates.

Other reasons the RBA cited for holding rates last month included the uncertainty in Europe and the United States. The situation has arguably stabilized in Europe and the debt ceiling deal in the US is now set to pass. Due to the progress in Washington, RBA watcher McCrann of the Australian Herald Sun wrote today that hes confident the RBA is about to announce a hike. His recent track record is spotty but hes still one of the best-connected RBA watchers. After last weeks high reading on inflation ANZ Bank, one of the biggest in Australia, also called for a hike.

The Australian dollar declined in the aftermath of last months RBA decision as policymakers cited worries about employment and growth. But AUD rebounded when the minutes of the decision revealed that policymakers remain upbeat. The concerns in the statement sounded more like a simple adjusting of time frames in the minutes. They cited production delays and indicated that growth that was expected to be harvested in Q3 and Q4 is still coming, but not until early 2012.

Given those expectations for growth, the RBA will likely raise rates later this year. They may signal this today by saying The Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.

This would be a strong signal for futures hikes and push AUD to a record high. The market is still pricing in lowered Australian rates a year from now, leaving AUD in a great position for gains. AUD/USD is trading close to 1.1000 after hitting a record 1.1080 last week.

Risks to this view are primarily external. The situation in Europe remains precarious and even though the US has a debt deal, growth is slowing. Domestically, what may keep the RBA on the sidelines is the belief that the high A$ will keep a lid on price pressures. Representatives from manufacturing and other non-resource sectors have also been lobbying hard for continued low rates.

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