The RBA holds firm, for now

As expected the RBA elected to keep the official cash rate at 2.75%, but the board still appears to be dovish. Governor Stevens noted that the exchange rate remains high despite a recent depreciation and inflation may provide scope for further easing if needed to support demand. Otherwise, the bank didn’t give much away.

Absent any massive downside surprises from domestic economic data or a worsening of global economic conditions, we expect the RBA to remain on hold from a while as it assesses the impact of prior easing. In order to do this the bank will be closely monitoring domestic economic conditions, particularly with regard to the labour market and interest rate sensitive parts of the economy. The board noted that the unemployment rate has gradually ticked higher in recent months, despite some very strong jobs numbers. If the unemployment rate continues to grind higher, it may be a catalyst for the RBA to cut interest rates.

Also, the Australian dollar has played a critical role in the RBA’s decision making process in the past and we expect it will be a determining factor in future policy decisions. Judging from today’s statement, the recent decline in the Aussie isn’t enough to relieve pressure on some trade exposed sectors of the economy. Thus, if the Australian dollar strengthens over the long-term, at a time when non-mining parts of the economy are expected to fill a potential gap in GDP left by an anticipated decline in mining investment, the stage may be set for more accommodative monetary policy.

On the ground floor in Australia business sentiment is icy at best and confidence at the retail level is weak, despite some indications otherwise. We note that there have been positive developments in the housing market, with building approvals looking strong. Weakness in other parts of the economy, however, largely overwhelms any strength from Australian retail real-estate market, thus we favour another rate cut this year.

The Aussie

What effect will this have on AUDUSD? This pair, like all of the majors, is largely being driven by the US dollar at the moment. This should remain the theme for now, as highlighted by last night’s surprisingly weak US manufacturing activity data, which resulted in a QE related USD sell-off. Nonetheless, the threat of further cuts from the RBA may limit AUDUSD strength in coming months. Combined with possible USD strength later this year, we express concern about any significant rallies in AUDUSD.

Source: Forex.com

04.06.2013