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The RBA hold their first monetary policy meeting of 2018 tomorrow and, whilst no policy change is expected, traders are particularly interested in the RBA’s response to the weak Q4 CPI print.
There had been hopes that CPI would nudge its way back within RBA’s 2-3% target band, yet as both broad CPI and trimmed mean CPI fell short of consensus, expectations for a 25bps hike were pushed back to 2019.
The impact of softer CPI can be seen on the implied yield curve chart, where markets now see February as the earliest window for a hike. Leading up to the data release, December was tipped to be the RBA’s first hike since November 2010 with a 50% chance of it occurring in November.
In tomorrow’s statement any comments surrounding the exchange rate could also warrant close attention. In November’s statement they reiterated that a higher currency “would be expected to result in a slower pick-up in domestic economic activity and inflation than currently forecast.” We have seen the RBA alter their tone and wording surrounding the exchange rate as AUD has traded higher in the past. And when you consider the broad gains AUD exhibited between mid-December 2017 and the end of January 2018, RBA may try to jawbone their currency.
Tomorrow’s meeting may also have a material impact on speculative positioning. We noted last week that AUD’s rally had primarily been driven by a weaker Greenback and large speculators appeared underwhelmed at the prospect of a hike in Q4. It is interesting to note that we’ve seen an increase of gross short positions which has dragged net-long exposure to a 3-week low. Even more interesting is that last week’s COTS report was compiled the day before weak CPI hit the screens. So, if we are to see a dovish meeting tomorrow, there’s a chance we could see net-exposure flip to net-short this week. We’ll wait for the RBA’s meeting to conclude before trading any AUD crosses.
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