RBA Interest Rate Decision - Oct. 2nd

The Royal Bank of Australia is scheduled to announce it's interest rate decision on Tuesday, October 2nd at 12:30 A.M. Their interest rate is currently 3.50%, and the market is pricing in a 60% - 65% chance of a 25 basis point cut (0.25%). Market participants are also pricing in approximately 100 basis points of cuts over the next 12 months.

One of the main considerations in the RBA's interest rate decisions is the economic strength of China, its largest trading partner. Chinese economic data has been weak in the month of August: Industrial production came in at 8.9% versus a previous 9.2% YoY, Foreign Direct Investment came in at -1.4%, and HSBC services PMI fell from 53.1 to 52. In addition, the HSBC Flash Manufacturing PMI for September came in at 47.8 versus a previous of 47.6 (anything below 50 is bad.) Although China has economic problems, the People's Bank of China (PBOC) just recently injected a record amount of cash into their money markets. The PBOC has also stepped up their rhetoric in regards to further stimulating the economy. If the PBOC does stimulate, it will help the Australian economy and be a boost to the Australian Dollar (the Aussie). I do expect the PBOC will stimulate before the end of this year; but only after the regime change takes place.

Australian economic data in the month of August has been weak as well. Employment came in at -8.8K actual, 5.0K exp., 11.7K previous (a downward revision). The unemployment rate actually fell from 5.2% to 5.1%, but that was actually BAD because it was due to a drop in the labor participation rate (65.0% actual, 65.2% previous). The Aussie trade balance also took a hit (-556M actual,  -227M previous). Note: The high exchange rate the Aussie is currently trading at is bad for exports, and Australia is largely an export based economy.

As the economic data in China and Australia has been bad, it definitely gives the RBA scope to cut rates. However, they may decide to hold off and monitor certain issues: the debt crisis in Europe, whether or not the PBOC decides to stimulate, commodity prices, etc. If the RBA decides not to cut interest rates this coming week, I think there's a high probability they will cut interest rates at the following meeting.

Royal Bank of Australia's Website