RBA Preview: Two scenarios and their implications for AUD/USD – TDS

Economists at TD Securities discuss the Reserve Bank of Australia (RBA) interest rate decision and its implications for the AUD/USD pair.

Hike +25 bps (40% prob)

“The motivation for the RBA to hike would be 1) It would be highly unlikely 1 month will be enough time for the RBA to assess the impact of its hikes since May'22. So why stop in April?; 2) The RBA could hike in April noting inflation is still high but signaling it's moving in the right direction leaving scope to pause in May following monthly inflation data for Jan and Feb suggesting Q1'23 CPI comes in below the RBA's implied 1.5% QoQ forecast; 3) The RBA pausing in April and then hiking in May potentially adds more confusion to the RBA's message. Historically once the RBA has paused on rate hikes, it has done so for a few months. AUD/USD 0.6720.”

Base Case: Pause (60% prob)

“The case for pausing is strong: 1) The Bank clearly stated a pause would be discussed at the Apr meeting in the Mar Minutes; 2) Discussing a pause for the Apr meeting suggests the appetite to hike in BOTH April and May is low, supporting a pause in April, but leaving open the possibility of hiking in May if CPI exceeds RBA forecasts; 3) Mention of the monthly inflation series was elevated to the top of the Mar Statement and the print for Feb published last week came in below expectations following a soft Jan print – both outcomes provide the RBA with room to pause; 4) The four data points the Governor cited – inflation, employment, retail sales and business activity do not collectively support a hike. AUD/USD 0.6630.”