AUD: Holding its nerve? - Rabobank

Jane Foley, senior FX strategist at Rabobank, notes that AUD/USD surged in the early hours of the morning in response to the RBA’s decision not to turn dovish and is likely to be highly sensitive to domestic economic data readings in the coming weeks as the market tests validity of the RBA’s view.

Key Quotes

“It appears the source of the RBA’s relative optimism stems from the labour market. The Bank forecasts that the unemployment rate will fall to 4.75% from 5% over the next couple of years and that this should result in some further lift in wages growth over time.  While this is a traditional view, tightening labour markets have been very slow to trigger wage inflation across the G10 during the past economic cycle and Australia is no stranger to low wage growth.”

“Despite the more optimistic than expected take-away from today’s policy meeting, the RBA’s February statement was tempered with some concerns. Policy makers did acknowledge that some downside risks have increased and it referred to the weaker than expected outcome for Q3 GDP growth.  It also referred to the housing markets in Sydney and Melbourne as “going through a period of adjustment, after an earlier run up in prices”.”

“In our view, the ongoing US-Sino trade wars should ensure a cautious tone from the RBA this year.”

“We continue to see risk that the RBA could still cut rates this year on the back of both domestic and overseas risks and that the AUD will trend towards the 0.68 area on a 12 mth view.”