May RBA SoMP Fails To Fuel AUD Bulls’ Hopes Despite Higher Inflation Forecast

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Reserve Bank Australia May Meeting Review

Following the delivery of the May RBA SoMP report on Thursday, following the bank’s May meeting earlier last week which, as expected, saw rates kept unchanged at record lows of 1.5%.The meeting was fairly uneventful with the bank’s accompanying statement mostly unchanged from April, concluding that:

“The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

Furthermore, there were no significant changes to the bank’s GDP forecasts with the statement saying that “the bank’s central forecast for the Australian economy remains for growth to pick up, to average a bit above the 3% in 2018 and 2019”.  Though in a slightly more positive update to the April statement the bank said that “this should see some reduction in spare capacity in the economy”. Regarding the labour market, the statement said that “growth has slowed over recent months” though inflation was more positive wit the statement saying that Q1 inflation readings “were in line with the bank’s expectations”, adding that “a gradual pick-up in inflation is expected as the economy strengthens”.

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Key Takeaways from the May RBA SoMP

The May RBA SoMP saw an extension of these comments with the bank raising its 2018 inflation forecast from 1.75% to 2% while the growth forecast was left unchanged, slightly above trend at 3.25%, for 2018 and 2019.

The bank’s upward revision to inflation was noted as being largely due to a higher starting point, with Q1 set at 2% versus 1.75% over the prior quarter alongside a lower exchange rate than was forecast three months ago.

Core inflation is forecast to stay around 2% over this year and next, not expected to print 2% until 2020. However, there are still important sets of data to come such as the wage growth report (due May 16th).

Once again, the bank highlights consumer spending as the most prominent domestic downside risk to its outlook along with the added risk of trade protectionism as the highest external risk. On the upside, the bank noted that next week’s budget announcement is expected to see the government announce further government spending.

AUD bulls were also encouraged by some adjustment to the language regarding the exchange rate, along with the higher inflation profile, which is now ending the week lower still. While the statement notes some positive developments overall there is not much here to get bulls excited.

The minutes of the April meeting showed that policymakers now agree with Governor Lowe, that the next move in rates will be up, though as yet there is nothing to suggest that this move will occur in the near future. The bank highlights the remaining risks around household spending and the housing market and as such a rate move is likely to stay on the back burner until these issues dissipate.

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Technical Perspective

May RBA SoMP 1

After breaking down through the rising bullish trend line from 2016 lows, AUDUSD found support at a test of the December 2017 low around .7498. After bouncing at this level, price has since found resistance at a retest of the broken short term bearish channel low. For now, pressure remains to the downside and a break of the December 2017 low will open the way for a deeper run down to .7329 which was the May 2017 low.

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