05 July 2016 at 5:36 GMT
- Reserve Bank of Australia holds benchmark rate steady at 1.75%
- AUDUSD was unmoved by the announcement
- A 25 basis point reduction in rate is now likely at the next RBA meeting on August 2
- Counting is ongoing after election, current conservative Coalition the likely winner
By Max McKegg
The Reserve Bank of Australia
held its benchmark rate steady at 1.75% after today’s monetary policy review. AUDUSD was unmoved.
The RBA left open the possibility, indeed probability, of an 'adjustment' sooner rather than later. Photo: iStock
There was more interest than usual in today’s decision because the RBA was the first central bank to make a call on rates post-Brexit. As this chart shows, forward curves in the US and UK
adjusted sharply lower after the Brits shot themselves in the foot, and traders have been waiting to see whether central banks would endorse that pricing.
The RBA had the first opportunity to do so and, while they didn’t cut on this occasion, the post-meeting statement left open the possibility, indeed probability, of an “adjustment” sooner rather than later. The key sentence in the statement was
“Taking account of the available information, the Board judged that holding monetary policy steady would be prudent at this meeting. Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”
That’s non-committal; but some traders thought the reference to rates being held steady “at this meeting” kept alive the chance of a cut at the next meeting in August, currently priced at a 60% chance. Significantly, there was no mention of the exchange rate.
Source: Westpac. Create your own charts with SaxoTrader; click here to learn more.
It’s unlikely the current political situation played much in their thinking. Counting is still going on after Saturday’s general election but bookmakers have current Prime Minister Malcolm Turnbull’s conservative Coalition odds on to be the government when the dust settles, albeit only with the support of a couple of Independents.
RBA Governor to end his tenure with a rate cut
A 25 basis point reduction in the 1.75% policy rate is now likely at the RBA’s next meeting on August 2nd, the swan song for Governor Glenn Stevens. A few days later the Bank’s quarterly Statement on Monetary Policy will be published, a comprehensive assessment of the outlook for the economy and a good opportunity to explain why a cut was needed.
The key local data point beforehand will be the June quarter Consumer Price Index numbers, due out on July 27. Inflation has fallen under the 2-3% target zone and the bank’s May economic forecasts assumed a rate cut to 1.5% would be needed to bring it back into line. Brexit-related risks to global growth and a rising exchange rate will add to the case.
In the meantime, the Aussie dollar will continue to be a magnet for speculators and real-money investors alike, the latter because of Australia’s AAA credit rating (one of a dwindling number of countries who retain that badge of honour) combined with a government bond yield curve offering better than 2% returns for 10-year plus maturities. Compare that to another member of the AAA club, Switzerland
, where the yield curve is now negative all the way out to 50 years (see chart below).
Commenting on Australia’s rating yesterday, Moody’s said that it expects “fiscal consolidation to remain a key policy objective” of the government that emerges after the politicians have finished their backroom dealing. Fitch and Standard & Poors gave similar warnings: there’s no room in the budget for a voter-friendly spending spree.
While interest rate differentials are calling the tune in the AUD at the moment, historically commodity price movements have been the decisive factor. But things have been relatively quiet on that front over recent months as illustrated in this chart of the RBA’s commodity price index. With iron ore leading the way, the index appears to have found a bottom, albeit hugely down from the boom-time top in 2012.
The combination of improving commodity prices and an appealing rate curve has pushed AUDUSD
up to 0.75 cents from its January low of 0.6825, largely unwinding the competitiveness gains made over the previous few years. The currency, as measured by the nominal exchange rate (also known as the Trade Weighted Index) is turning back up at the same time as Australia’s costs of production (relative price level) have been rising faster than those of its competitors. Hence, the overall measure of competitiveness, the real effective exchange rate, is a less positive factor in assisting Australia's transition from reliance on the mining boom to a broader based economy.
However the RBA does not seem too concerned at the moment, judging by the no comment in today’s statement.
Australia’s media outlets are transfixed by the personalities and politics of the still unresolved general election, but traders know it’s the Reserve Bank, not the government, that moves financial markets these days. So attention was on the statement the Bank’s Board released a short time ago after its policy review meeting ended. However, the statement was non-committal on whether there would be any “adjustments to the stance of policy” in the short term. Nevertheless, market pricing suggests a better than 50/50 chance of a cut at the RBA’s next meeting on Aug 2nd.
– Edited by Susan McDonald
Max McKegg is managing director of Technical Research Limited. If you would like an email notice each time Max posts a trade or article then click here or post your comment below to engage with Saxo Bank's social trading platform.