Release: RBA Interest Rate Decision Consensus Forecast: 4.25% Previous: 4.25%

Date/Time: 03/05/12 10:30 PM ET (03:30 GMT)

RBA in Wait and See Mode

The RBA meets Monday evening for US traders, and Tuesday morning for those in Australia. The expectation is that the central bank will hold rates steady at 4.25% for a second straight meeting.

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The bank is now in a wait-and-see mode as some of the external factors that had worried the RBA - the Euro-zone sovereign debt situation, slowing Chinese growth, and prospect of a weak US economy - have subsided. Sentiment has improved around the sovereign bond markets in Europe after the ECB's LTRO actions, US data is showing momentum, and we have seen the Chinese authorities responding to weaker growth by lowering their reserve ratio requirement.

Latest Data from Domestic Economy Does Not Suggest Reason to Cut Rates

At home, prospects improved with January's employment data which showed the economy adding close to 50K jobs, and with the unemployment rate dipping to 5.1%.

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To note also is comments from Philip Lowe, RBA deputy governor who said even a rise in the unemployment rate may not bring more rate cuts.

From The Australian: Philip Lowe, the RBA's new deputy governor, suggested in a speech last month that a modest increase in unemployment would not be enough to trigger a rate cut. The bank's latest set of minutes indicated the economy would have to weaken materially to prompt a further cut.

UBS chief economist Scott Haslem is sceptical, telling The Australian: There's no historic evidence of the RBA staying put on rates in the face of rising unemployment, whatever its officials might say in public.

Business and consumer sentiment has become more optimistic as well.Wages grew more quickly than expected in the 4Q which also bolsters the case for the RBA to hold rates steady to keep inflation from accelerating.

width=444Therefore, we shouldn't expect the RBA to change its tune too much from its previous statement in which it said that lower rates would come only if the economy weakens materially. There has not been evidence of that recently.

That means that the RBA rate decision does not become a major risk event. Still, its important to monitor the latest assessment of the economy, as it offers clues as to what the RBA will do next. It will also be important to monitor this week's Aussie fundamental releases including GDP data for the 4th quarter and February's labor market report.

The AUD/USD pair has been ranging in a sideways channel, with support near 1.0590 and resistance near 1.0850, after rallying strongly from mid-December to early February. While the RBA decision may not pack a punch, its still an important week for Australia fundamentals and therefore maybe we get a decisive move one way or another past our recent key levels. If not, then this sideways range may continue until general risk sentiment chooses a direction.

From a fundamental standpoint, the strengthening of the AUD will put downward pressure on Australia's manufacturing sector which will likely increase unemployment from that sector. However, the RBA seems to be tolerant of a higher exchange rate at this moment.

Market Unwinds Expectations for Larger RBA Rate Cuts in 2012

The Credit Suisse overnight index swap market shows the expectation that in 1-year's time, the RBA will lower rates by 40 basis points. That is up from expectations of 100 basis points in cuts from January.

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That tells us that the interbank market has unwound its expectations for a more aggressive rate-cut policy from the RBA. Therefore we should revisit this index at the end of the week after we have a chance to assess the RBA statement, 4Q GDP data, and the employment report.

We will be reviewing the impact of this release on various AUD crosses in the Tuesday Market Intelligence Briefing.

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Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.