The Reserve Bank of Australia (RBA) left the official cash rate at 2.5%, reiterating that the most prudent course is likely to be a period of stability in interest rates. The market was expecting as much, but the Aussie did fall slightly on the back of the RBA’s decision. This may have been due to the perception that the RBA is not as comfortable with the level of the exchange rate as previously thought. The bank noted that the decline in the exchange rate has helped foster growth, but it remains high by historical standards. This is a small step up from last month, where the RBA simply gave the lower exchange rate its tick of approval in its statement accompanying its monetary policy decision.
On the economy, the bank noted slightly firmer consumer demand and a strong expansion in housing construction. The RBA also mentioned improving business confidence and conditions, as it did last month. At the same time, the board mentioned last week’s Q4 CAPEX report. It seems that Governor Stevens drew much the same conclusions as the market did, albeit a more upbeat view than some. Resource sector investment is falling off a cliff, while lingering uncertainty and structural change keep business investment in non-mining parts of the economy subdued.
Inflation: labour market vs. exchange rate
The key takeaway is that there’re two key areas to continue watching: the labour market and the exchange rate. The bank noted that as long as domestic costs – wages - remain restrained, it could weigh on prices of non-tradable goods. Trade expose sectors, however, are benefiting massively from a lower exchange rate, which was largely responsible for last quarters strong CPI figures. The question is which force is stronger: a lower exchange rate or subdued domestic costs? At the moment it’s likely the former, but that may change later in the year, especially if conditions in the labour market continue to deteriorate. If this happens and inflation moderates, then the RBA may reintroduce a much more dovish tone.
The Aussie
AUDUSD spiked up towards 0.8970 – 200-hr SMA - very briefly, before crashing back to settle around 0.8925, which coincidently is right around where it was before today’s better than expected building approvals data. Overall, the pair remains in a short-term downward trend, thus our bias remains lower.
Source: FOREX.com
Recommended Content
Editors’ Picks
EUR/USD fluctuates near 1.0700 after US data
EUR/USD stays in a consolidation phase at around 1.0700 in the American session on Wednesday. The data from the US showed a strong increase in Durable Goods Orders, supporting the USD and making it difficult for the pair to gain traction.
USD/JPY refreshes 34-year high, attacks 155.00 as intervention risks loom
USD/JPY is renewing a multi-decade high, closing in on 155.00. Traders turn cautious on heightened risks of Japan's FX intervention. Broad US Dollar rebound aids the upside in the major. US Durable Goods data are next on tap.
Gold keeps consolidating ahead of US first-tier figures
Gold finds it difficult to stage a rebound midweek following Monday's sharp decline but manages to hold above $2,300. The benchmark 10-year US Treasury bond yield stays in the green above 4.6% after US data, not allowing the pair to turn north.
Worldcoin looks set for comeback despite Nvidia’s 22% crash Premium
Worldcoin price is in a better position than last week's and shows signs of a potential comeback. This development occurs amid the sharp decline in the valuation of the popular GPU manufacturer Nvidia.
Three fundamentals for the week: US GDP, BoJ and the Fed's favorite inflation gauge stand out Premium
While it is hard to predict when geopolitical news erupts, the level of tension is lower – allowing for key data to have its say. This week's US figures are set to shape the Federal Reserve's decision next week – and the Bank of Japan may struggle to halt the Yen's deterioration.