The Reserve Bank of Australia will announce the results of its April meeting on Tuesday, April 4. In the run-up to this event, the aussie is noticeably nervous, and not just in the AUD/USD pair. Increased volatility is also observed in all cross pairs involving the Australian dollar.
0 or +25?
There is no consensus in the market on the possible results of the April meeting: according to some experts, the central bank will keep the monetary policy parameters unchanged, while others believe that it will raise the rate by 25 bps. Considering the uncertainty, there is no doubt that the pair may face volatility on Tuesday.
The main argument for the RBA's wait-and-see stance is the slowdown in inflation in Australia. The key inflation indicator has been actively declining for the second straight month, which indicates a definite trend. This trend echoes the RBA's assumption that inflation has already reached its peak. In January, the consumer price index in Australia fell sharply enough to be at 7.4% while the forecast was for a decline to 8.1%. In February, the CPI growth rate was expected to slow down to 7.2%, but the indicator came out at 6.8%.
Such trends should be viewed through the prism of the RBA meeting in March, the results of which were not in favor of the Australian dollar. On the one hand, the central bank raised the rate by 25 points, thus preserving the hawkish rate. On the other hand, the RBA made it clear that it is approaching the end of the current cycle of monetary tightening. The March text of the accompanying statement was softer than previous communiques. Initially, the central bank dropped words about future interest rate hikes: instead, the RBA used more vague wording, noting only the "possible need" for further monetary tightening. Second, the RBA was concerned about the weak growth of the country's economy in Q4: GDP increased by only 0.5% versus the previous three months. This result was below forecasts - most experts had expected to see growth of 0.8%.
Considering the fact that after the March meeting, the consumer price index came out again in the red zone, the probability that the status quo will be preserved at the end of the April meeting is quite high.
Bearish notes of the RBA March minutes
Let's look back on the minutes of the March meeting. According to the text of the document, the RBA decided to discuss the arguments in favor of a pause at the next meeting, recognizing that this step will allow additional time to reassess the prospects for the economy.
At the same time, the minutes indicate that further tightening may be needed to reduce inflation. The central bank stressed that at the April meeting, the members will assess data on employment, inflation, retail trade, as well as the overall situation in the global economy.
Commenting on the minutes, RBA Governor Philip Lowe said that the central bank is close to pausing rate hikes, as QE is "in restrictive territory" at the moment, and the decision to pause will make it possible "to look around and assess future prospects." Lowe suggested that the pause could be taken as early as April, "but a lot will depend on macroeconomic data, especially inflationary growth dynamics." A few days after these words, the aforementioned inflation report was released.
At the same time, some experts still insist that the RBA will decide on another round of rate hikes. For example, Goldman Sachs economists are confident that the RBA will increase the rate by 25 basis points. Arguing their position, GS analysts noted that the consumer price index in Australia is still too high, and in the services sector it is even accelerating (from open sources there are "clear signs of acceleration of inflation in this sector"). Overall, according to Goldman Sachs analysts, Australian inflation is "still too high", so the RBA will be forced to take another step towards tightening monetary policy.
Other experts voiced a similar position, including economists from the UOB Group, ANZ Bank and currency strategists from Commerzbank.
Conclusions
As we can see, there is no consensus in the market regarding the possible outcomes of the RBA April meeting. In my opinion, the central bank will keep rates unchanged, amid slowing inflation, weak GDP growth and the aftermath of the US "banking crisis". This decision will put quite a lot of pressure on the pair, which is now rising due to the weakening greenback. That said, the possibility of a 25-point scenario does exist, given the fact that inflation in Australia is still far from the RBA's target. The continued intrigue will provoke strong volatility in the pair, whatever the outcome.
Given this high degree of uncertainty, it would be wise to take a wait-and-see stance, despite the strong rally we witnessed on Monday. The bullish momentum was due to the dollar's weakness, which is giving up its positions all over the market. But AUD/USD traders will switch to the RBA April meeting on Tuesday, the outcome of which will have the strongest impact on the pair. In such circumstances, it would be best to stay out of the market.