The Reserve Bank of Australia held cash rate unchanged at 3.0% at the latest decision today. Below are the key takeaways:
RBA sees downside risks to global growth reduced, though growth will remain “a little below average” for sometime. United States is experiencing “moderate expansion” while China’s growth remain “stable”. Asia growth is affected by also “stabilizing”.
Verdict – Mildly hawkish
Growth in private consumption, though strong growth of past “unlikely”. Investment outside mining remain subdued, though modest increase likely in 2014. Exports of natural resources improving but public spending is “constrained”.
Verdict – Mildly hawkish
Effects of 2011 and 2012 rate cuts to be expected in 2013. Exchange rate higher than expected and affecting export price. Inflation outlook will allow for future rate cuts “if necessary” to support demand.”Prudent” to maintain current rates.
Verdict – Mildly dovish
RBA is sounding less and less dovish with its future economic outlook. There was scant mention of Cyprus and the recent fiasco in the Euro-Zone. It is obvious the RBA is not happy with the high AUD, but they are unable to do anything about it as inflation currently is on target. Even though RBA says that inflation outlook provides scope for future easing possibility, it is highly unlikely that they would actually embark on any inflationary measures unless inflation (aka demand) is below current levels. Overall, this give us a mild hawkish statement from the RBA today.
Market picked on this immediately, and AUD/USD rallied higher. 1.047 provided short-term resistance and price pulled back significantly, giving back a large portion of its gains. 1.045 swing high of 28th Mar and floor of 26th may also provide interim support against significant pullbacks. After the dust has settled, it is apparent that we are not far off from where prices were prior, not a surprising outcome given that Overnight Index Swap has only priced in a 8% probability of a rate cut this time round. This RBA decision is not catching anybody off guard. Of more interest is the fact that price was rallying even before the news event, an observation that can be attributed to USD/JPY’s recent fall. With RBA out of the way, further fall in USD/JPY could result in USD weakness spilling over and potentially pushing AUD/USD above 1.047.
The bullish breakout from the descending Channel has not been invalidated, with price merely resting on 1.035 and now 1.04. However, bullish momentum may only pick up should 1.05 recent swing high has been breached, which may open up 1.06 objective once again. Stochastic readings are pointing higher once more, forming a trough just as 1.04 support is confirmed, suggesting that we could still see higher highs if current bullish momentum is maintained.
One word of caution though, RBA’s hawkish outlook does not equate to Australia’s economy doing well. In fact, some of the assertions by RBA such as improving Capex in 2014 may be overly optimistic. Previously, RBA has stated that investment in non-mining industry would grow in 2013, but that hasn’t been evident thus far after Q1. Australia is still relying heavily on the mining industry for GDP growth with RBA themselves believing that the sector is peaking in 2013. As long as the Government nor RBA address this issue, improving global outlook will only delay the inevitable decline. A hawkish RBA simply means that possibility of rate cut decreases. This will certainly help AUD/USD remain supported, but do not simply think that AUD/USD will be able to hit previous years highs due to this alone.
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