AUD Drops As RBA Keeps Rates on Hold For 26th Consecutive Month

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In line with broad market expectations, the RBA kept rates unchanged at its October monetary policy meeting held overnight. This is now the 26th consecutive month that the central bank has kept rates on hold at record lows of 1.5%.

The statement was largely unchanged with little in the way of new details. However, there were some positives with Dr Lowe highlighting declining unemployment which, at 5.3%, is at its lowest level in six year. Looking forward, Lowe said that “A further gradual decline in the unemployment rate is expected over the next couple of years to around five per cent.”

Wage Growth Still An Issue

Commenting on wage growth, which has been one of the most persistent hurdles facing the RBA, Lowe said “Wages growth remains low, although it has picked up a little”. Looking forward, the RBA governor said “The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process.”

Lowe on Housing

However, the RBA continues to highlight the negative impact of tighter credit conditions on mortgage holders though did note that mortgage rates reman low and competition for high quality credit is healthy.

On this matter Dr Lowe said “Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low… Growth in credit extended to owner-occupiers remains robust, but demand by investors has slowed noticeably as the dynamics of the housing market have changed. Lowe added “Credit conditions are tighter than they have been for some time, although mortgage rates remain low and there is strong competition for borrowers of high-credit quality.”

House Prices At Lowest Level Since GFC

The latest economic data released this week showed that Australian home prices suffered their biggest monthly decline since the global financial crisis. September marked the 12th consecutive month of decline sin the nation’s housing market with Melbourne now having over taken Sydney as the weakest domestic housing market.

After peaking in September of last year, house prices have now dropped by 2.7% with capital cities posting 3.7% losses. Losses in Sydney alone are now at 6.1% followed by Darwin at 3.7% and Melbourne at 3.4%.

The RBA continues to reaffirm its view that the next move in rates will be up, though again, as yet there is now word on timing and for now, the market is not expecting a rate hike until the end of next year.

Market Reaction & Technical Perspective

australian dollar

The Australian Dollar has been under heavy selling pressure over the last month as continued tightening by the Fed has exacerbated the policy divergence between itself and the RBA. According to the latest CFTC data, downside exposure has been grown by over 30% in recent weeks and will likely have grown further this week judging by the post-RBA selloff we have seen so far.

rba

After breaking down through the rising trend line from 2016 lows, AUD has been moving in stair-step fashion lower and after finding support at the .7153 level, that zone is now under pressure again. If we see a break down below this level, focus will turn to a run down to deeper support at the .6831 level which was the 2016 low. To the topside, any rally higher should find resistance on a retest of the big .7505 level which was big support last year. Unless this level is broken, focus stays on further downside.

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