RBA on the Razor’s Edge

The Australian dollar slumped on Monday in the ninth decline in the past 10 sessions. It's near a cycle low as the clock ticks down to the RBA decision. We look at what's expected and what to expect. The latest Premium trades include EURGBP. EURCAD, CADJPY and GBPAUD.

The OIS market is pricing in a 75% chance of a cut when the decision is delivered at 0430 GMT. Probabilities swung toward a cut in the past two weeks as iron ore prices dropped and capex spending dried up.

Economists are a bit less convinced of a cut but they're usually loath to change their estimates so close to decision unless it's a slam dunk. In Bloomberg's survey, 13 economists see a cut and 17 see no change. Even for those expecting the RBA to remain on hold, a rate cut is only a matter of time. All but one economists sees Stevens lowering rates to 2.00% at the subsequent meeting at the latest.

That might mean that any bounce in the Australian dollar on a decision not to cut rates might just set up AUD shorts from better levels in the days ahead – especially if the US dollar rebound from Monday continues. The best argument not to cut is housing, the latest data on the home market remains buoyant including a 14.3% rise in building approvals reported last week. Approvals were expected up 10.7%.

A final data point before the decision is the Feb retail sales report due at 0130 GMT. It's expected to rise 0.4% and with the decision so close, it may lead to extra volatility.

A final thing to keep in mind is an ongoing investigation into a leak at the RBA. The Aussie rallied about 45 pips about 30 seconds before the March decision to hold rates. The bank said it wasn't leaked on its website and doesn't yet have any answers.