RBA preview: what about the Aussie?

The Reserve Bank of Australia (RBA) is expected to leave the official cash rate at 2.5% at its monetary policy meeting tomorrow. The bank has routinely expressed that the most prudent course is likely a period of stability in interest rates. In other words, the RBA is happy to remain on the sidelines as prior easing finds its way into the real economy. However, is it going to try and talk down the Australian dollar?

The RBA has been uncharacteristically quiet about the recent rise in the exchange rate. The bank has previously stated that its outlook on the economy doesn’t have the Australian dollar above 90.00 US cents. With AUDUSD bouncing off a resistance zone just below 0.9300 late last week, the RBA may try and talk down the commodity currency once again. This could weigh on the AUD, as the market appears to have gotten used to the RBA not engaging in verbal intervention.

Since the bank last met local economic data has been broadly positive, which reinforces the bank’s decision to remain on hold and see how the economy reacts to changing economic conditions. Thus far, the economy appears to be handing its transition away from mining investment better than previously thought. While investment intentions outside of the mining sector are lower than the RBA would want, there are signs of life in the economy. Consumers are returning to stores and the residential property market remains red hot. At the same time, Australia’s labour market appears to be improving.

Last quarter economic growth accelerated to 0.8% from 0.6%, beating an expected increase to 0.7%. In February, we witnessed a surge in full-time employment, which is the first really positive sign we have gotten from Australia’s labour market in a long time. Full time employment increased a staggering 80.5K over the month – the most full time jobs added in a single month since 1991. Overall employment rose 47K and the unemployment rate remained at 6.0%. This report is potentially a game changer for the Australian economy, assuming it’s not a one-off and people continue to find full-time employment.

The other important positive economic data released last month showed a jump in the trade balance to 1,433m and a 1.2% surge in retail sales in January. On the downside, consumer confidence fell this month and NAB’s Business Conditions Index dropped to 0 in February. Overall, there was nothing to suggest that the RBA needs to change its view on the economy as a whole and it likely want’s to assess Q1’s inflation figures before possibility changing its view on interest rates, but the bank is becoming increasingly concerned about a bubble forming in the residential property market.

From a technical standpoint, AUDUSD remains in a broad upward trend but the pair is in the process of retracing some its recent gains. At the time of writing it’s testing a support zone around its 100-hr SMA. Below here the pair may find further support around 0.9150. On the upside, 0.9295 is going to be a key resistance zone for AUDUSD.