Market Musings: RBA: Navigating the uncertainty

After kicking off its policy recalibration at its meeting in February the RBA kept the cash rate steady at 4.1% today. This was widely expected. The RBA’s post meeting statement didn’t provide any strong signals about the timing of the next possible move. This is also something Governor Bullock tried to avoid in her press conference. Uncertainty clouds the domestic and global landscape; hence the RBA is awaiting some clarity as it navigates the tricky terrain. With there being upside and downside risks around the outlook, and with the Board “cautious” about how things may pan out, the RBA reiterated it will be guided by the data and events with its priority squarely on bringing inflation “sustainably” to target in a reasonable timeframe.

The uncertainty offshore is one factor playing on the RBA’s mind. As the RBA noted US tariff announcements are impacting confidence, and this might be “amplified if the scope of tariffs widens” and/or other nations retaliate. This appears likely given the looming US ‘reciprocal’ tariff announcements. In our view, the US’ protectionist policy push suggests US growth risks are increasingly shifting to the downside while it is also generating short-term inflation pressures. Outside of the US however authorities such as in China are pulling various levers to guard against headwinds, while in Europe governments are moving to lift fiscal/defence spending. How these cross-currents impact growth and inflation in Australia is unknown. The RBA looks well positioned to respond to how things evolve. Our base case is for the RBA to deliver a little more interest rate relief over the coming year with ~2-3 reductions anticipated as policymakers look to gradually reduce the degree of policy restrictiveness. A move on 20 May, which will give the RBA time to digest upcoming US tariff decisions, the quarterly Australian CPI (released 30 April), and the state of the local jobs market (due 15 May) is possible, although it isn’t guaranteed.

In terms of the AUD, the looming US reciprocal tariff announcements are the next major event risk. These measures are scheduled to be unveiled later this week (Thursday 6am AEDT). More bursts of AUD volatility should be anticipated leading up to and around the event as there is still a lot of uncertainty about what the next phase in the Trump Administrations move to realign global trade may look like. That said, on net, we continue to believe that further falls in the AUD shouldn’t be long-lasting or overly large, and that over the medium-term there are uneven risks near current levels (i.e. there is more upside than downside potential).

Outcomes relative to expectations matter in markets. And in our judgement a decent amount of negativity looks factored in (the AUD is ~4 cents below our 'fair value' models). Moreover, forces that have cushioned the AUD over the past decade remain (i.e. Australia’s improved capital flow trends and higher terms of trade). Since these dynamics came to the fore the AUD has only been below $0.6250 ~2% of the time since 2015.

Added to that, when it comes to trade/tariff risks, we think that: (a) much like during President Trump’s first term any tariff induced export pain in China should continue to be offset via measures aimed at boosting commodity-intensive infrastructure investment. This is where Australia’s key exports are plugged into; and (b) Australia’s direct trade relationship with the US is minimal. Only ~4% of Australia's exports are sent to the US, and Australia is one of the few nations the US runs at trade surplus with. In our opinion, this can help the AUD recoup lost ground on some of the more beaten up cross-rates.

Peter Dragicevich Currency Strategist - APAC peter.dragicevich@corpay.com