In the latest meeting minutes, RBA members appeared to be much more dovish than before. The previous bullish bravado about China has gone into hiding, being replaced by cautious mentions of weakening consumption and slower economic growth. US fared slightly better, with private investments “more than offset” the cut in public spending due to the sequesters. Nonetheless, RBA concede that current growth in US is not enough to improve employment growth significantly. On Europe, RBA believes that some countries would cut down on their austerity programs, which is interesting as Germany has been continuously rallying EU countries to stick to the painful austerity path. It remains to be seen whether countries can indeed scale down their austerity measures without renegading on agreements made for ECB/IMF and Troika support.
Under Domestic Economic Conditions, RBA noted that CPI has been lower than expected, with “widespread” price declines across tradable items ( e.g. commodities) despite stable AUD exchange rates for the past few years. Members are concerned over rising domestic costs and decreasing margins for businesses, and fear that such trends may continue further. Growth activity continues to be below trend, while labor conditions remain “subdued”, with growth in employment below growth in working-age population.
With regards to Monetary Policy, members noted that the effects of earlier rate cuts are still working into the economy, but current inflation outlook which has been revised lower due to international and domestic concerns allow RBA to carry out additional rate cut this time round. To top it off, the minutes highlighted members continued concerns about the rising housing costs, but went ahead with a rate cut as credit lending remain flat, providing RBA scope for the rate cut in May.
All in all, the overall dovishness of the minutes is not surprising, as this is the minutes that accompanied the surprise rate cut in May. As such, we should never be looking out for dovish talks, but rather, check for further rate cut intent from the minutes. In this regard, the minutes was a let-down. There was no mention of further possible cuts, but instead RBA concluded the minutes with some concerns that would in fact be stumbling blocks for rate cuts in the near future.
AUD/USD first went lower due to the overall bearish tone, but rallied stronger due to reasons stated above. Traders were already pricing in the scenario of hints of future rate cuts by RBA earlier, with price falling below 0.98 and breaking the rising Channel around 1 hour before the release of the minutes. This disappointment puts the earlier bearish breakout in doubt, with will open up 0.98 and Channel bottom to be tested, and a move back into Channel becomes possible once again.
From a technical point of view, current price levels is being weakly supported by the descending trendline that has been in play since last week. Should price manage to break below the trendline, we could see stronger selling action and a renewal of bearish pressure, negating this week’s bullish correction that has been in play since Monday. However, fundamentals does not seem to support further AUD/USD weakness right now, which put bulls in charge and current incumbent recovery rally on higher initiative. Continue to watch 0.98 and 0.975 as important levels that bulls/bears need to cross in order to establish themselves more strongly in the short-term.
From the weekly chart, 0.96 – 0.94 will provide final support against the strong sell off which started in April. Longer term wise, Westpac research shows that markets are pricing a 2.43% AUD cash rate by end 2013, which suggest that another rate cut is possible in the next 6 months. However that is purely on market speculation and not a firm indication of what RBA will do. If market is correct, a break below 0.96 becomes possible especially if price continue to remain around current levels when RBA does cut its policy rate. The flip side is that AUD/USD may also rally higher should RBA decided not to cut rates, as a further rate cut scenario appears to have been priced in already.
With that in mind, traders may wish to seek clarity from further RBA meeting minutes and decision making statements in order to have a better gauge of what may transpire in the near future. Either way, AUD/USD is primed for strong trends for the rest of the year – Either a strong movement up higher towards 1.06 if RBA stays, or below 0.96 towards 0.91 if RBA slash and dice.
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