The Reserve Bank of Australia (RBA) is a focal point today with the publication of its quarterly ‘Bulletin’. This document contains articles related to the economy, policy, and broader topics.
A key event is RBA Governor Bullock’s speech on “The RBA’s Dual Mandate – Inflation and Employment” at the Anika Foundation in Sydney. This is scheduled for 0305 GMT on Thursday, July 24, or 2305 US Eastern time on Wednesday, July 23.
Anticipation Of Rate Cut
The RBA’s next meeting is set for August 11-12. During this meeting, a 25 basis points rate cut is broadly anticipated.
We believe the upcoming speech from Bullock is the most critical event before the August policy meeting. With financial markets pricing in a rate cut, her tone on inflation and employment will be scrutinised for any hints that challenge this view. Traders should therefore position for potential volatility, as her words will directly shape expectations.
If her remarks emphasize recent weakness in the labour market, it will reinforce the case for monetary easing. We’ve seen Australia’s unemployment rate tick up to 4.1% in recent months, which provides a clear justification for her to signal a rate cut is coming. This would likely cause yields on short-term government bonds to fall and solidify bets for August.
Conversely, any focus on stubborn price pressures could catch traders off guard. Australia’s latest quarterly CPI inflation reading was 3.6%, which is still well above the central bank’s 2-3% target range. A hawkish tone from her, highlighting this persistence, would force a rapid unwinding of rate-cut positions.
Market Probabilities And Strategies
Current market data shows derivatives pricing in about a 70% probability of a 25-basis-point cut in August. This suggests the market is leaning dovish but is not entirely certain, leaving room for a significant repricing. Her speech is the catalyst that could push that probability towards either 100% or back below 50%.
Historically, the market has been wrong-footed by the central bank before, particularly in late 2023 when expected rate cuts did not happen due to sticky inflation. This precedent serves as a strong reminder that a widely expected policy move is never guaranteed. We must treat the current consensus with caution.
In response, we see value in using options to trade the potential price swings rather than taking an outright directional bet. Purchasing straddles on the Australian dollar or short-term interest rate futures would allow traders to profit from a large market move, regardless of the direction. This strategy effectively trades the outcome of the speech itself.
