TD Securities expects the Reserve Bank of Australia to keep the cash rate at 4.35% at next week’s meeting, after a run of softer domestic data and Federal Budget tax changes. Markets will be focused on whether the RBA signals an extended pause, a stance that would be read as dovish. Trimmed mean inflation is described as remaining elevated for some time, while TD Securities also points to the output gap closing.
On activity, it argues the RBA’s models are unlikely to be flagging an imminent recession. It cites NAB’s capacity utilisation measure trending down towards its long-term average, which implies the positive output gap is narrowing, and it also indicates a rise in unemployment above the quarterly averages in the RBA’s May Statement on Monetary Policy forecasts for this year. Attention turns to the May CPI release on 24 June as a test of whether an August hike remains feasible or whether rates stay on hold for longer. Separately, Federal Budget changes to negative gearing and capital gains tax are expected to slow credit growth.
Market Reactions, Rate Expectations, and Trading Strategies
Given the recent run of softer economic data, we expect the Reserve Bank of Australia to keep the cash rate at 4.35% at its meeting next week. Recent figures showing annual GDP growth slowing to just 1.2% and the unemployment rate ticking up to 4.2% support this view. The market’s main focus will now be on whether the RBA signals an extended pause, which would be seen as a dovish shift.
Our conviction for an August rate hike is fading, and derivatives pricing reflects this, with markets now assigning less than a 15% chance of a hike, down from over 40% just a month ago. Traders should consider positions that benefit from rates staying stable or falling, such as buying September and December cash rate futures. These instruments will gain value if the central bank reinforces its on-hold stance.
Inflation Data, Currency Implications, and Policy Risks
The upcoming May inflation data on June 24th is the next major catalyst that could introduce volatility. We see opportunities in options markets to trade around this event, potentially by selling out-of-the-money call options on bond futures. This strategy profits if the inflation data comes in soft, further cementing the case against another rate hike.
This policy shift also has clear implications for the Australian dollar. A central bank that is stepping back from a hiking bias will likely weigh on its currency, especially as other global banks maintain a hawkish stance. We believe there is an opportunity to position for a weaker AUD against the US dollar in the weeks ahead.
The Federal Budget’s tax changes, which are expected to slow credit growth, further reduce the urgency for the RBA to tighten policy. Any surprisingly strong inflation print on June 24th remains the primary risk to this outlook. This single data point will be critical in confirming whether a prolonged hold is the most likely path forward.
