While the RBA hasn mentioned the possibility of a rate cut Intesa Sanpaolo believe this is a sign of caution rather than preparation for an imminent move.

Better than expected employment figures replaced dampened business confidence to result in gains for the AUD against major currencies.

However, the volatility of the labour market in Australia is not helping to avert the bearish AUD outlook.

Uncertainty is high on the policy decision that will be taken at the Reserve Bank of Australia (RBA) next meeting on 1st December.

Thus, markets are eagerly awaiting the publication of the RBA’s November policy meeting minutes, to be released on November 17, which may shed some light as to the bank’s future actions.

For now, we know the RBA chose to leave the interest unchanged at 2.0%, but indicated the possibility of a further rate cut.

Mirroring, to a degree, the economic woes of the EU, the RBA seems more concerned with the inflation trend, which has been worse than forecasted, rather than the growth picture. Inflation in Australia seems to be stabilised at 1.5% for the third quarter, failing to reach the expected 1.7% and the desirable 2.0% target.

Consequently, the RBA has revised its inflation forecasts for the fourth quarter of 2015 to 1.75% from 2.5%; and from 2 – 3% to 1.5 – 2.5% for the second quarter in 2016. Inflation forecasts, as well as growth forecast, for the end of 2016 through to 2017 have remained the same.

Rate Cut Still Not Guaranteed

Although the above economic data and comments by RBA officials suggest a strong possibility of a further rate cut very soon, analysts at Intesa Sanpaolo are not yet convinced of this.

Intesa Sanpaolo clarifies, “The new scenario outlined by the RBA does not 'guarantee' another rate cut. Reference to this option should be intended more as cautionary than preparatory, on condition, however, of the global growth picture not deteriorating further, with China at the fore, and/or commodity prices not dropping further.

“Specifically, the probability of another slackening of monetary policy would increase significantly in case of a downward acceleration in commodity prices in the closing weeks of the year.However, already in the short term, help should come from external factors.

“If the Fed hikes rates next month (FOMC meeting on 16 December), the US dollar should appreciate across the board, and the Australian dollar, by contrast, should weaken: our projections point to a decline towards AUD/USD 0.68-0.66 on a 1m-3m horizon.

“The trend of the exchange rate would therefore have a supportive effect on both growth and inflation, and would spare the RBA having to act on rates. On this aspect, the RBA reasserted once again this month that the Australian dollar is adjusting to the drop in commodity prices, whereas until July it had judged the national currency as overvalued, explicitly advocating its further depreciation.

“In the SMP, the RBA added that weakening of the exchange rate is effectively helping domestic producers face the drop in commodity prices.”

Uncertainty Remains High

It is still unknown which way the RBA will go at its next meeting, December 1, which is the reason for high anticipation of the November meeting minutes.

Looking ahead, Intesa Sanpaolo is of the view:

“Beyond the short term, we confirm our expectations for a gradual recovery of the Australian dollar towards AUD/USD 0.75-0.80 on a 12m-24m horizon, given the fact that the RBA still expects inflation to rise back to target already by the end of next year, and growth to accelerate both in 2016 and in 2017.”