BofA expects RBA to hold cash rate at 3.60% amid economic strength

Bank of America analysts expect the Reserve Bank of Australia to maintain its cash rate at 3.60% at its September 30 meeting, aligning with market consensus, citing Australia's positive output gap, persistent inflation, and a tight labor market. They anticipate Governor Bullock will emphasize data-dependence with limited forward guidance, potentially striking a hawkish tone, while noting the Australian dollar remains undervalued. Concurrently, BofA maintains a medium-term bearish outlook on the U.S. dollar, despite its recent boost from Fed commentary, as corporate demand has largely offset hedge fund buying.

Analysis

Bank of America (BofA) analysts anticipate the Reserve Bank of Australia (RBA) will maintain its cash rate at 3.60% in its upcoming meeting, a view that aligns with market consensus. The rationale for this hold is based on Australia's positive output gap, inflation projected to persist within a 2.5-3% range, and a labor market that is tighter than the RBA's own definition of full employment. Following 75 basis points of easing since February, BofA expects Governor Michele Bullock to adopt a data-dependent stance with limited forward guidance, but potentially with a hawkish tone that could exceed current market pricing. In the currency markets, BofA notes that the Australian dollar remains undervalued against the U.S. dollar. This is juxtaposed with BofA's medium-term bearish outlook on the USD, which persists despite a recent rally following Fed commentary. The analysis suggests the dollar's strength is not supported by overcrowded short positions, as corporate demand has largely absorbed hedge fund buying during the third quarter.

Key Decisions for Investors

• Investors should consider that a hawkish hold from the RBA, coupled with Bank of America's view that the Australian dollar is undervalued, may present a tactical opportunity for long AUD positions.
• Monitor the RBA's forward guidance closely, as any tone more hawkish than anticipated could challenge the market consensus and serve as a primary catalyst for AUD appreciation against the USD.
• While the medium-term outlook for the U.S. dollar is assessed as bearish, the observation that positioning is not stretched short suggests that further USD downside may not be immediate and could be tempered by continued corporate demand.