The RBA remains on hiatus

The Reserve Bank of Australia is widely expected to leave the official cash rate at 2.5% for the 13th straight month on Tuesday. In fact, the meeting may prove to be a non-event for the market. There haven’t been any major changes to economic conditions in Australia since the RBA last meet and the slight increased geopolitical risks and concerns about China’s economy are going to be weighed against renewed hope for non-mining sectors of the economy and positive business and consumer confidence figures. Meanwhile, the softening of the exchange rate should reinforce the RBA’s wait-and-see mentality.

Australia’s mixed jobs report

A couple of days after the RBA’s August policy meeting, the Australian Bureau of Statistics (ABS) released Australia’s July jobs report. The report was very mixed but not overly concerning. The unemployment rate jumped to a 12-month high at 6.4% due to an increase in labour force participation and a large loss of part-time employment. The good news was that there was a surge in full-time employment during the month. In the RBA’s meeting minutes, the bank noted the recent weakness in the labour market, stating that “a notable degree of spare capacity in the labour market suggested by the relatively high unemployment rate and the participation rate being close to its lowest rate in almost a decade.”

CAPEX

The other big event in Australia last month was the release of Q2’s private capital expenditure report, which gave us some hope that the economy is successfully transitioning away from its reliance on mining investment. Business investment jumped 1.1% in Q2, beating an expected 0.9% fall. Perhaps the most encouraging part of the report is the forward looking indicators for non-mining parts of the economy. Seasonally adjusted estimates for other selected industries, where the services sector makes up the bulk of the numbers, increased by 3.4% in the June quarter. This was a positive surprise, but there’s still a ways to go before it can cover the losses coming from the mining sector. The seasonally adjusted estimate for mining was little changed, but it’s clear that investment intentions remain on a downward trajectory.

Encouraging confidence data

In other news, consumer and business confidence both rose last month which is encouraging. Consumer confidence jumped to 3.8% according to Westpac, but the index remains in contraction territory. NAB’s July Business Confidence Index jumped to 11 from 8. A lack of confidence amongst corporations has been a major concern for the long-term outlook for growth and the labour market, thus robust confidence is something to cheer about.

The Aussie

A big area of concern for the RBA during its hiatus has been the strength of the Australian dollar, thus the recent softening of the exchange rate will remove some lingering impetus to further support the economy. In saying that, the aussie has regained some of its lost ground in the last week and some recent comments from RBA officials clearly highlight that the board still believes that the commodity currency has further to fall. We expect the bank reiterate as much at Tuesday’s policy meeting.

AUD’s reaction

Given that we aren’t expecting the RBA to deviate at all from its plan to remain on the sidelines for the foreseeable future, the meeting may be a non-event for the market. In saying that, the market rarely doesn’t have an opinion one way or the other, thus we cannot rule a short-term movement on the back of a stray comment from RBA Governor Stevens.

From a technical perspective, AUDUSD remains trapped in its medium-term trading range and a lot of indicators aren’t leaning heavily in one direction or the other. We are keeping our eyes on Australia’s Q2 GDP figures (exp. 0.4% SA q/q – 0130GMT 03/09) and important resistance and support zones around 0.9375 and 0.9235 respectively.

Source: FOREX.com