RBA Held Rates Awaiting Growth and September FOMC

The Reserve Bank of Australia kept interest rates unchanged after its meeting in early September at 2.00 percent. The central bank was awaiting the results of the gross domestic product in the second quarter. As expected the GDP disappointed by missing forecasts with a 0.2 percent reading. The previous quarter the Australian economy had grown by 0.9 percent, and economists were expecting a 0.4 percent figure. The RBA also held rates in anticipation of what happens later this week with the U.S. Federal Reserve.

An interest rate cut by the Australian central bank could be wasted if Chair Janet Yellen and her colleagues decide the U.S. economy is ready for higher interest rates and boost the USD at the same time. The AUD would depreciate which is the RBA’s objective and it could accomplish this without lowering the rate, already at an all time low. This is the best case scenario for the RBA regarding its American counterpart, yet the Fed has so far disappointed with a soft signalling of intent and at times contradictory statements from policy members.

The RBA issued a short statement “In Australia, most of the available information suggests that moderate expansion in the economy continues”. The release of the minutes from the September 1 meeting will provide further insight into the central bank’s decision to hold rates, and given how the GDP came in “moderate” the short assessment was not far off the mark.

Australian Employment Keeping Aussie Bid

A month after touching a 13 year high, the unemployment rate in Australia fell in August to 6.2 percent as it added more than 17,000 new jobs. With bad news coming out of China hitting the Australian export sector the recovery in the jobs component managed to stop the decline of the AUD as it managed to bounce from lows around 0.69 and climb to 0.7050 ahead of the RBA minutes and the market moving September Federal Open Market Committee (FOMC) on Thursday.
Lack of September Action by Fed to Boost AUD

The Federal Reserve has been coy in announcing a clear schedule to the start of their interest rate hike cycle, opting instead to leave it up to the data. The “data dependency” forced upon by the central bank has increased volatility and each indicator is measured against its potential impact on the American benchmark interest rate.

With a mixed collection of economic indicators, with only employment as part of a solid pillar of recovery, it has become unlikely the Fed will hike in September. This also puts in jeopardy the next likely candidate which is the December FOMC meeting as the last thing the U.S. central bank would like to do is to inject volatility in an otherwise thin trading environment. If the Fed needs a reminder of what uncertainty can do ahead of the holiday season it could take a look at the volatility of the 2012/2013 debt ceiling crisis. The White House learn its lesson and was able to push back the 2014 deadline to January 15 avoiding any unnecessary drama.

The Fed does have a third option if a 2015 rate hike is to happen and that is the October FOMC meeting. June, September and December were favoured ahead of October given that the first three meeting are followed by a press conference while the last one does not. Fed members have said in the past months that there can be no press conference needed, but the market so far disagrees given the importance of the first rate hike to be just dropped without a chance for the Fed to address the questions from members of the financial press.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza