Trading the RBA meeting next week

It was the wage price index that was in focus last week. Why? Because this is the central bank’s focus too. This was the comment on wages the RBA made in their last rate meeting decision: 

Wages growth also remains modest and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target

This means that the RBA would like to see wage growth as a signal that inflation is ‘sustainably’ at target. The emphasis here is with the word  sustainably. Australia’s headline CPI inflation sits at 3.5% and they have underlying inflation at 2.6%. Now that is right in the middle of their 2-3% target band. So they have achieved their target right? Wrong, in the eyes of the RBA. They will only achieve this target when wages are at least 3%. That’s the ‘sustainable’ level.

The last wage price index

All conditions apart from wages have been met for the RBA to hike rates. For the last wage price index 2.4% y/y was expected, but 2.3% was printed. Now that was still breaking off recent lows and was a decent gain in wages. It was the fastest pace in wages in over 3 years.However, it may not be enough to get the RBA moving. If the wages had printed around 2.6% y/y+ then the AUD would most likely be strongly gaining into the RBA meeting on anticipation of rising rates. The RBA have set the level of 3% as the indicative level by which wage growth can be expected to support inflation. 

The AUD reaction post RBA 

We could see the AUD drop lower if the RBA take a more dovish stance. Based on their own logic there is not quite enough for them to take a hawkish stance. However, trading central bank meetings is always uncertain, so the RBA could throw in a surprise. The AUDJPY offers good value at market for the medium term or even better value on dips. Stops can be tight managed as shown below and the BoJ are maintaining a very dovish stance at the moment that is likely to continue. Remember that after the last RBA meeting there was a credibility issues as the RBA were seen as too dovish by the market. So, even a slightly positive tone will result in some AUD gains out of this meeting. It’s a meeting to watch. It’s on Tuesday March 01 and I will be discussing what it means after the event and any opportunities that are obvious.