RBA likely to be on hold

The RBA cash rate is likely to be on hold for an extended period, but with the continued risk of a rate cut even as recent commentary from the bank has taken on a more neutral tone. This risk reflected frustration with both the pace of recovery in non-mining activity and the overvalued exchange rate, as well as uncertainty about the outlook for China. 

"Given recent dramatic events in equity markets and an increased downside risk from China, next week's policy press release is expected to take on a more dovish tone. The RBA will highlight the effect of China on increased volatility in financial markets, although the RBA may not go as far as investors hope given that the market is pricing a 33% chance of a 25bp cut next week and is almost completely pricing in a cut by the end of this year", says Barclays. 

As for the exchange rate, the RBA will still argue that the falling currency is helping the economy adjust to lower commodity prices, although the RBA will be disappointed that the Fed seems likely to push out the timing of its first rate rise. This is because the RBA has long hoped that higher US interest rates would help send the Australian dollar lower.

"A 0.4% q/q gain is expected in GDP in Q2, although there is greater uncertainty about this forecast than usual. This is because it is not sure whether the national accounts branch of the ABS exercised discretion when compiling GDP from recent partial indicators. That said, the ongoing improvement in the labor market points to an upside risk to this forecast",  added Barclays.