“Scope for further easing should that be necessary to support demand”.
This same line has been spotted word for word in 3 consecutive RBA minutes, and traders are basically treating it as par for the course rather than attributing any rate cutting significance to it. However, the latest RBA meeting minutes is nonetheless more dovish than before. RBA’s outlook on global economic conditions has been tapered back from the relatively bullish outlook of previous month.
Economic growth “average” but remained steady – as opposed to “sustainable growth” mentioned last month
Housing sector shows further improvement with growth in NFP increasing. However sequester cuts expected to pull economic down.
Economic activities expected to be “subdued” and conditions remain poor. Cyprus highlighted EZ “fragility” – no mention of Euro-Zone previous month
Slower growth in 2H 2013 expected, mining sector likely to slow. Housing sector improved with construction industry healthy. Increase in employment spotted during Feb could be merely a change in data sample.
On the balance of things, RBA is showing more concern over growth rates both within and beyond Australia’s shores. However, in the concluding paragraphs on Monetary Policy, RBA maintained that previous rate cuts will still be working themselves into the economy, and it is “more prudent” to maintain current rates with that in mind. Being prudent also suggest that we will not be seeing any “bold strong monetary policies” aka BOJ shenanigans coming out of RBA anytime soon.
AUD/USD dipped slightly due to the marginally more dovish minutes. However reaction is muted as traders focused on the fact that RBA is remaining prudent. Similar to New Zealand, Australia is facing risks of inflation due to its relative “safeness” that is its AAA credit rating. Investors seeking safety will also be attracted to the high deposit interests offered, which resulted in inflation rate and asset prices trading higher than average in Australia. Recently RBNZ has indicated that they may wish to hike rates in order to bring down inflation. RBA hasn’t gone to such extreme steps to address inflation risks, but certainly this issue will shackle RBA’s ability to truly slash rates aggressively.
It is also worth noting that price is currently trading higher after the sell-off, continuing the rebound after price tagged 1.03 earlier following Monday’s slide. This is a good sign that this minutes did not trigger any renewed belief in RBA’s rate cutting possibility. Price is currently pushing up higher, seeking 1.035 with stochastic reading suggesting that a bullish cycle may be underway, though the cycle may be cut short with an interim peak appearing to be forming right now.
Daily Chart shows price below 1.035, the significant Fib 50% retracement which is the confluence for structural support back in March. Stochastic readings suggest that the break below 1.035 may be sustainable with 1.03 being threatened as Stoch readings are still far away from the Oversold region.
Fundamentally, a weak AUD/USD in the long-term is not hard to imagine with Australia domestic economy not looking so hot right now. Recent surprising increase in unemployment rate suggest that current increase in domestic consumption may not be sustainable. If we throw in peaking mining sector, and lower exports, it is hard to paint a rosy picture for Australia in 2H 2013, which RBA agrees. Despite this, to have AUD/USD heading lower will also need further USD strength. Recent sell-off in commodities have triggered fear slightly and US stocks have traded sharply lower yesterday. If this fearful sentiment continues, we could see AUD/USD heading lower, though any action by the Fed to ease the fears will end up weakening USD and push AUD/USD once more. Hence the direction of USD is certainly not so clear and traders will need to keep their guard up even if AUD/USD clear the 1.03 support to open up 1.015 as possible bearish target.
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