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
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