Preview: RBA Set to Cut Interest Rates - Impact on AUD

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By Nick Nasad | February 7, 2012 3:59 AM EST

Release: AUS RBA Rate Decision
Consensus Forecast: 4.0%
Current Rate:
 4.25%
Date/Time: 02/06/12 10:30PM ET (3:30 GMT, 2/7)

RBA Ready to Cut Rates Yet Again

The expectations heading into the upcoming RBA interest rate decision is for the central bank to maintain a loosening bias by lowering interest rates by another 25 basis points, or 0.25%, to 4.0%.

That would be the 3rd straight cut in rates from the RBA, as it tries to counter an economy that is showing a weak labor market, softer housing, flat retail sales, and concerns about the global outlook.

Weak Employment Picture Clouds Consumer Sentiment

The main concern for the RBA is the labor market, which saw very uneven performance in 2011, with job growth unable to beat job losses during the year.

In December, the economy shed close to 30K jobs, an unexpected development.

A weaker labor market has put pressure on consumer spending, and in fact 2011 was the worst for retail sales in nearly 28 years.

From Sydney Morning Herald: "Retail sales in Australia posted their weakest annual growth in 27 years in 2011, as consumers cut spending in favour of saving and paying down debt.

Annual retail sales grew 2.4 per cent in 2011, easing from a 2.5 per cent rise in 2010. Last year's increase was the weakest since 1984 when the Australian Bureau of Statistics began the data series.

In the the crucial month of December, retail sales posted a surprise 0.1 per cent fall, according to the ABS figures released today."

Retail sales fell 0.1% in December, and in the chart below we see the deterioration in retail sales over the last 5-6 months - a clear downward trend, that the RBA would like to reverse by lowering households mortgage and other loan payments via lower benchmark interest rates.

Slowing Housing Market Also a Concern

Another concern is the state of the housing market. New home sales have declined considerably during 2011, especially in the second half of the year.

A lower RBA rate would imply lower mortgages, and perhaps give the housing market a shot in the arm in the first half of 2012.

Inflation Easing

At the same time that economic conditions are below what the RBA would want, inflation has been cooling, meaning the RBA is not overtly concerned about inflation pressures at the moment.

CPI was down to a 3.1% pace in annualized terms through the 4th quarter. Therefore, the RBA will be more comfortable lowering rates having had the data confirm is belief that inflation peaked in the middle of 2011. The private sector reading on inflation for January - the TDMI Inflation Gauge - came in at 0.2% month-over-month, a slowdown compared to the 0.5% rate seen in December.

Implications on Aussie of RBA Rate Decision

If the RBA goes through with cutting rates for the 3rd straight meeting, it would be a negative fundamental factor from the interest rate yield perspective. However, even at 4%, Australia still will maintain the highest interest rate out of the developed world countries and so its advantage will ease only in relative and not in absolute terms. That should help continue to support the AUD as a destination for carry trade despite the recent easing cycle by the RBA.

In other words, while it may pressure the Aussie in the short-term, it may not be a game changer for the AUD/USD overall.

The AUD/USD has been a major benefector of the risk asset rally we have seen throughout January, and following the strong NFP report on Friday, the pair reached a high of 1.0790. It eased from there following concerns around Greek bailout negotiations and so the state of "risk sentiment" is precarious early on to start this week. Where equities and risk sentiment go will be crucial for the Aussie.

Still, an overtly dovish RBA decision and statement could undermine the AUD/USD recent strength, and cause the pair to test recent resistance turned to support at the 1.0675 area. A break there would create the possibility of further risk to the downside.

If the RBA decides to hold rates steady, and does not go through with another rate cut, that would be a positive development for the AUD/USD and give it a chance to maintain its gains from last week, and to use that support (Friday's and Monday's lows) as a springboard to further gains to the topside.

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Nick Nasad is an analyst, educator, and trader; and one of the main contributors to FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes and IBTRADE will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

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