AUD Higher on Brighter RBA Tone

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Aussie Rates Unchanged

The Australian dollar has been higher over-night as the market digested the latest RBA meeting. At its November rate-setting meeting, the RBA opted to keep rates unchanged. They are at their current record lows of 1.75%. While the market was not expecting the RBA to cut rates further this month, downside risks were noted heading into the meeting. The decision to keep rates on hold has been taken as a sign of confidence, helping underpin AUD at these levels.

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Lowe Cites Better House Prices

Commenting on the decision to keep rates unchanged, RBA Governor Dr.Lowe pointed to the recent recovery in the unemployment rate as well as inflation. House prices have also experienced a mild pick up recently. In particular in the two key housing markets of Sydney and Melbourne. These improving dynamics have alleviated some of the pressure on the RBA to reduce borrowing costs further. However, the RBA did note that the domestic economy is continuing to run below the trend.

Key Takeaways from the Statement

  • Economic outlook little changed from the last forecast three months ago.
  • GDP forecast to run at 2.25%, increasing to 3% by 2021
  • Unemployment rate to trend lower and fall below 5% in 2021
  • “The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth”
  • “The main domestic uncertainty continues to be the outlook for consumption, with a sustained period of only modest increases in household disposable income continuing to weigh on consumer spending.”
  • “The easing of monetary policy since June is supporting employment and income growth in Australia and a return of inflation to the medium-term target range,”
  • “Given global developments and the evidence of the spare capacity in the Australian economy, it is reasonable to expect that an extended period of low-interest rates will be required in Australia to reach full employment and achieve the inflation target.”

Summary

In summary, the RBA meeting was broadly positive. Though in truth it marked no material difference from the last forecast. The bank expects the economy to gradually pick up. They are, however, wary of the persistent risk of low household income and its impact on consumption. Consequently, the bank is expected to maintain an easing stance going forward.

Australian Federal Treasurer Maintains Inflation Target

AUD received a further boost overnight. The Australian federal treasurer Josh Frydenberg announced that he is not pushing for a reduction in the inflation target as part of the maintenance of the monetary policy agreement between the RBA and the government. The official framework sets out key objectives that will be targeted by the RBA’s monetary policy. This includes a flexible target range which has been between 2% and 3% since the 1990s. However, with inflation consistently running below that level over recent years there have been calls to reduce the target.

Inflation To Return To Target

Frydenberg said:

“Following careful consideration ... I have concluded that the existing statement is consistent with the government’s and the RBA’s shared understanding of our monetary policy framework. Not changing the statement provides continuity and consistency at this time of global economic uncertainty. Domestic and global markets can be reassured that Australia remains a stable and predictable place to invest.”

Ultimately, Frydenberg echoed the RBA’s sentiments. He said: “inflation is expected to return to the band”.

Technical Perspective

AUDUSD

AUDUSD is testing the bearish trend line from mid-2018 highs, along with structural resistance at the .6927 level. The level held as resistance on the first test. However, with the retracement finding support into a retest of the .6883 level, focus is on further upside. If we break above the trend line, the next level to watch will be structural resistance into the .6983 level.

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