RBA: Are they too negative?

Giles Coghlan LLB, Lth, MA Financial Source

The Reserve bank of Australia interest rate decision was as expected. The cash rate was kept at 0.10% and the 3 year bond yield target was also held at 0.10%. This was as expected and the focus was always going to be on the central bank's future guidance.

A gain in optimism from the RBA

The board recognised that the recovery in Australia had been stronger than expected. The unemployment rate has fallen to 5.8% in February. At the previous RBA meeting the board had seen unemployment around 6.0%, so 5.8% is at the lower end of what they had been expecting. However, the RBA still stated that unemployment is too high and that spare capacity will keep wage pressure subdued and therefore not generate a long term rise in inflation.

The three-year bond target remains the RBA target. Later in the year the RBA will consider whether to keep the 2024 bond target or shift to the next maturity. Bond purchases are continuing as per schedule with the RBA ready to make further bond purchases if necessary.

House prices gain

House price gains were noted as increasing and the RBA will be keeping an eye on this. As a reminder, remember that low financing conditions has been boosting house prices across the world.

2024 is still seen as the earliest date for rate rises and the RBA repeated that inflation needs to rise into that 2-3% target range. Once again the RBA does not want to nudge ahead of the Federal Reserve.

Key point to note

Any further improvement in the labour market will be a big tick for the RBA and is worth watching out for at the next labour data point on Thursday, April 15. A strong rise in labour data can help the RBA change their forward guidance and lift the AUD.

Key charts to watch

The general point to be aware of is that the RBA could end up being too cautious. While they are stressing uncertainties, the general picture is of a faster than expected recover. This means that the risk is that the RBA is too cautious. In terms of a currency pair to trade further AUD gains particularly against the EUR can reasonably expect. The EUR is pressured by rising COVID-19 cases in Europe, so expect sellers on rallies higher.

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Author

Giles Coghlan LLB, Lth, MA

Financial Source

Giles is the chief market analyst for Financial Source. His goal is to help you find simple, high-conviction fundamental trade opportunities. He has regular media presentations being featured in National and International Press.

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