RBA On Hold, Easing Bias Intact Amidst Low Inflation

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Notes From The Statement

The RBA opted to keep rates on hold at their October rates meeting in line with broad market expectations. However, the accompanying statement was notably dovish. The first statement from new RBA Governor Lowe highlighted downside global economic developments.

The bank noted that global inflation remains mostly below central banks’ targets whilst full-time domestic employment was subdued. Consumer spending was noted to have softened; government bond yields are near historic lows and growth in rent is at its lowest for decades.

The statement keeps the bank’s easing bias intact, despite having already cut twice this year. These earlier cuts were however referenced by the Governor as reasons for keeping rates on hold at this juncture. This suggests that the RBA have moved in to wait and see mode for the time being.

Looking back to last year, once the bank had cut rates from 2.25% to 2%, they then waited until May of this year before initiating further easing.  At this stage, there isn’t a great deal of evidence suggesting a strong response to the easing which again keeps the bank’s easing bias intact, as suggested by their rather downbeat assessment.

Traders now turn their attention to the bank’s November meeting. Ahead of that meeting, we have the Q3 inflation report which could prove to be the catalyst for further easing if current subdued levels are maintained. Currently sitting at just 1%, inflation has been steadily declining in Australia moving down from highs of 1.7% in January.  If Q3 inflation remains below 1.5%, this is likely going to be enough to pressure the RBA into further easing.


However, the stronger than expected building approvals data today, alongside a firm rebound in Australian retail sales suggests that if the full-time employment reading later in the month is also strong, then the RBA may choose to once again remain on hold. US data will also be closely watched over the following weeks as an increased perception that the Fed will raise before year end also takes some pressure off the RBA.


For now, AUDUSD remains consolidated in a contracting triangle within a broader bullish channel. Friday’s US employment reports are likely to provide the catalyst for a directional move from here.


USDJPY continues to hug the key psychological level of 100 which has become a floor for the pair over recent months. Upside moves have so far been capped by selling linked to hedging Japanese exporters. Japanese exporters have seen their internal hedging rates adjusted from 105/110 in the first half of the business year to around 100 over the final half of the year. This has consequently seen a gradual lowering in the cap level to below 100.

The 100 level has also been a source of key demand with dip buying seen linked to Japanese pensions, lifers and also some importers too. With speculators having failed to make a sustained breach of the 100 level this has reinforced a short-term dynamic whereby many unwind short positions into the level as a clear profit target, reinforcing the levels significance as a floor.

With so much room to the downside in USDJPY, speculators continue to hold large short positions and simply manipulate their short-term component in response to various factors such as verbal intervention by Japanese officials. This leads to very short term rebounds in USDJPY, but nothing material and the pressure remains upon the 100 level.


The latest rebound comes on the back of yesterday’s stronger ISM Manufacturing print which was above expectations at 51.5 in September. This data is providing an early boost for the US Dollar ahead of Friday’s jobs data. USDJPY has now broken above the bearish trend line which has capped price for several months now. Today’s close will be closely watched with a sustained move above trend line resistance likely to attract breakout traders.

Ahead of the US employment reports on Friday we also have the ISM Non-Manufacturing component on Wednesday expected to improve to 53 from 51.4 previous. Print in this region would further support USD heading into Friday’s data.


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