Extreme monetary easing by the Bank of Japan on Friday has done little to strengthen the case for the Reserve Bank of Australia to cut the cash rate at Tuesday's board meeting, but it is likely to slow any further depreciation of the Australian dollar.
In late afternoon trade, the local unit was fetching US70.75¢, down sharply from a high of US71.41¢ after the Bank of Japan on Friday introduced negative interest rates on excess bank reserves.
However, the Aussie still remains well above the almost seven-year low of US68.27¢ logged in mid-January, amid renewed market turmoil and commodity price weakness.
Patchy US economic data and signs of a less aggressive tightening cycle by the US Federal Reserve have also held up the Aussie in recent days.
The domestic currency's relative resilience against the greenback and those of its trade partners is likely to be noted in Tuesday's RBA minutes, Nomura chief rate strategist for Australia, Andrew Ticehurst, said.
"The Australian dollar [against the greenback and the trade-weighted index] has declined a fraction since the RBA last met in early December, but only modestly – 1.2 per cent – and iron ore and many commodity prices are also somewhat lower over this period," he wrote.
"We believe that a weaker Australian dollar – as the Fed tightening cycle gets under way – has been a central part of the RBA's thinking, and we are particularly interested in its comments here, wondering quietly whether it is disappointed that the Aussie has not declined further."
Virtually no chance of cash rate cut
Despite these concerns, interest rate futures pricing suggests virtually no chance of a cut to the cash rate on Tuesday, as underlying strength in the domestic economy and job market override broader worries about global demand and the so-called currency wars.
However, some commentators expect governor Glenn Stevens' accompanying statement to be slightly less upbeat than the outlook offered after December's board meeting and in subsequent comments.
Friday's Statement on Monetary Policy could also reflect widening jitters about the Chinese slowdown, weak oil prices, US growth and global demand, UBS economist Scott Haslem said.
"Overall, we expect the RBA's post-meeting press release and SoMP to embody more dovish tones – if only as they acknowledge the reality of the recent turmoil in commodity prices and some loss of momentum in US growth," he said.
Despite this, he does not expect the RBA to alter its growth or inflation forecasts for 2016.
"The key risk, to our view, is that they augment a more dovish tone with modest [0.25 percentage point cuts] to late 2016-17 forecasts. This would support market pricing for a further RBA rate cut mid-2016, and add some downside pressure to the Australian dollar," he said.
The Bank of Japan on Friday became the fifth central bank to introduce negative interest rates in recent years, following similar moves by monetary policy setters in Denmark, Sweden, Switzerland and the eurozone.
When conventional monetary policy fails
Central banks resort to negative nominal interest rates when conventional monetary policy and other extreme measures such as asset-buying have failed to stimulate the economy as much as wanted.
By penalising lending institutions for leaving excess cash on deposit, policymakers hope to encourage the extension of credit to individuals and businesses and discourage saving.
Lower rates also make a currency less attractive to investors, fuelling speculation on competing units, making exports more competitive and fanning inflation through higher import prices.
After being bolstered as a safe haven asset during the market ructions of December and January, the yen lost more than 2 per cent against the greenback after the BoJ's surprise move on Friday.
Some commentators pointed to monetary easing by China, and some recent devaluation of the yuan, as the BoJ's main motive.
BK Asset Management's managing director for foreign exchange strategy, Kathy Lien, said it won't be long before the RBA acknowledged the risk of the Chinese slowdown to its own outlook.
"With the Chinese economy slowing and commodity prices falling, it may be difficult for the RBA to maintain a brave face," she said.