The Aussie Dollar Holds Onto Gains As RBA Strikes a Neutral Tone
The Reserve Bank of Australia (RBA) shifted down a gear from upbeat to mostly neutral in the wording of the accompanying statement to their March policy meeting.
The bank left interest rates unchanged at 1.5%, as broadly expected, and spoke positively about changes in the global economy.
They were more downbeat about the lack of wage growth, the preponderance of part-time jobs being filled and the impact this was having on inflation which remained below target.
The RBA seems to have a high tolerance of low-inflation, commented UBS's Scott Haslem following the meeting, which raises the bar quite high for future interest rate cuts.
"As we’ve noted on numerous occasions, this continues to suggest the hurdle for further rate cuts this cycle is high. However, the RBA is also comforted by the fact that inflation remains “quite low” and this points to little near term urgency to back away from record low cash rates," said Haslem.
The downside of the record low 1.5% lending rate is that it is in danger of causing a housing bubble.
The RBA statement was more balanced about rising house prices noting regional variations.
"Conditions in the housing market vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years," the RBA said.
Despite this ANZ's David Plank noted changes in the wording which implied the RBA might have to take steps to limit borrowing.
"Here were only a few changes of note in the RBA’s statement, mostly with regard to housing," and went on to say that he thought house price inflation in Sydney and Melbourne might spur the RBA into increasing its macro-prudential measures, which is a fancy name for making mortgage lending more difficult," he said.
A final noteworthy element in the RBA's note was the sentence saying the Australian Dollar had depreciated to a tolerable level since 2013.
The statement said, "The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment."
This proved wrong analysts who had thought the RBA would talk down the exchange rate, and was a bullish sign for the currency.
Declining Data
The statement was actually quite optimistic given how Aussie eco data has soured recently.
BK Asset Management’s Kathy Lien, an old hand at the currency gain noted how the Australian Dollar softened since the recent stream of negative data hit.
“The Australian dollar could no longer hold onto its gains. The currency fell sharply against the greenback following disappointing trade numbers and extended its losses on the back of a weaker PMI services report. Service-sector activity contracted for the first time in 5 months, offsetting the strength seen in the manufacturing sector,” she said.
Whilst it fell, it fell from a historically high level, which has itself become a problem for the Australian economy, especially exporters who actually do better when their home currency is weaker as it makes their goods more competitively priced.
The RBA will be thinking about the fact the currency is still too high to help exporters and may wish to talk it down, so there is a risk of downside for AUD pairs following the meeting.
“The latest trade-balance report was a sharp reminder of the damage that a strong currency can do to an export-dependent economy. The trade surplus shrank to 1.3B, less than a third of forecasted levels as exports fell 3%,” said Lien, who goes on to comment on how the RBA may change its stance.
“The RBA is widely expected to leave interest rates unchanged but it may start to sound less optimistic. The last time it met, RBA maintained an upbeat tone that included a positive outlook on consumption, non-mining business investment and growth. Since then, we’ve seen business confidence and manufacturing activity improve with Q4 GDP growth surprising to the upside while labor-market activity and consumer inflation expectations weakened significantly. In other words, there are new factors for the RBA to be concerned about and its bias will determine whether (AUD/USD) 75 cents breaks or holds,” said Lien.
Other analysts, like RBC Capital Markets Adam Cole, are not as worried, and actually think the RBA to strike a pretty neutral tone which might have only a slight downside effect on AUD, given it will only be a slight shift down from the previous upbeat tone.
“Having just refreshed its forecasts as part of its February communication, we do not expect much policy signal from the RBA. Global growth looks increasingly robust, the terms of trade have held their recent gains, and Q4 domestic growth was almost ½%pt better than its estimate. We expect this to leave the statement with a neutral tone,” said Cole.
One factor which could keep the RBA leaning towards a ‘glass half full’ outlook is January retail sales, which rose 0.4% m/m, exactly in line with consensus, and above the recent run of 0.2% results, therefore showing a fairly strong rebound in consumer spending in January.
“Retail sales rose by 0.4% in January, which was in line with our own and the consensus forecast. This followed soft sales in previous months, with average monthly growth of just 0.2% in the three months to December,” said St George Economics, commenting on the data.
“A moderate pace of growth in retail sales in January is encouraging. While ongoing low interest rates will support spending, very weak wages growth and intense competition in the retail sector are likely to keep retail sales subdued,” they concluded. Forextell said they thought the encouraging Retail Sales data would have a direct impact on the RBA’s tone:
Forextell said they thought the encouraging Retail Sales data would have a direct impact on the RBA’s tone:
“The RBA also meets (Tue) but Retail Sales (Mon) will make things interesting leading into the event. Governor Lowe was relatively hawkish last time, but recent data has been mixed with a downwards tilt. With this new information, the RBA’s tone may be more cautious. Retail Sales will play into this picture,” said Forextell.
Some analysts still think the tone of the statement will remain hawkish and upbeat, such as Forex.com’s Fawad Razaqzada, who says that:
“At its most recent meeting on February 7, the RBA judged that holding interest rates unchanged would be “consistent with sustainable growth in the economy and achieving the inflation target over time.” There were no clear hints of further rate cuts or concerns about the appreciating exchange rate. And given that not a lot has happened since that meeting, there is a very low probability of a rate cut at this meeting. In fact, it is more likely that the rate statement will convey a more hawkish tone than dovish. So the Australian dollar may strengthen on the back of it.”
