The veteran economist, Saul Eslake, sees Australia’s abandoning 50bps rate hikes going forward. He sees a sharper slowdown in GDP and labour data which he thinks could see the RBA only needs to raise rates to 2.5% this year.

Short Term Interest Rates Markets pricing

At present STIR markets are pricing in a 70% chance of a 50 bps rate hike for the RBA’s 06 September meeting. This is down from last week when a 76% chance was seen. The end-of-year rate is seen at 3.34%, so Saul Eslake considers that the RBA will be less aggressive.

A slowing economy?

The RBA’s August statement has the following outlook for GDP, inflation, and unemployment:

However, Eslake considers that although the RBA is right on inflation it is less accurate on the GDP and unemployment print. He expects unemployment to rise and GDP to miss the RBA’s projections. So, going forward, the incoming inflation, labour, and GDP data are likely to move the AUD. AUD traders should watch out for intraday opportunities on short-term deviations.

The risks

One key risk to this outlook is the Iron ore, copper, and coal markets. These commodity markets are very important to Australia’s economy and if these prices remain high that is supportive for the AUD. Also, Chinese activity data is very important for AUD. A slowing economy from China has a knock-on impact on the Australian dollar too.