On 6 April the Reserve Bank of Australia surprised most analysts by announcing it would maintain the cash rate at 2.25% and any future change in policy would be data dependent. Naturally, in a world of vanishing yields the demand for the Aussie dollar surged relative to major currency pairs. EUR/AUD has the potential to continue its trend lower. The logic is simple. The ECB is committed to its bond purchasing program to the extent of purchasing sovereigns with a slightly negative yields while the RBA may maintain the cash rate.
The Australian economy has been slowed by declining demand for its commodity exports. It seems that the RBA chose not to react to events out of its control. What the RBA did choose to react to was an internal risk: a very hot housing market. Property prices in Sydney and Melbourne have been accelerating at double digit rates. The RBA did note that mortgage lending has slowed. Simply put, demand for commodities is not expected to increase before the next meeting at least. There is no shortage of cash liquidity in the region and at far lower rates. Whereas, a runaway property market could result in an inflated Aussie dollar while the economy slows; a phenomenon referred to as ‘stagflation’.
The Australian economy has been slowed by declining demand for its commodity exports. It seems that the RBA chose not to react to events out of its control. What the RBA did choose to react to was an internal risk: a very hot housing market. Property prices in Sydney and Melbourne have been accelerating at double digit rates. The RBA did note that mortgage lending has slowed. Simply put, demand for commodities is not expected to increase before the next meeting at least. There is no shortage of cash liquidity in the region and at far lower rates. Whereas, a runaway property market could result in an inflated Aussie dollar while the economy slows; a phenomenon referred to as ‘stagflation’.
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