Rates Held At Record Lows
At its final meeting of the year, the Reserve Bank of Australia displayed a vote of confidence in the domestic economy by keeping rates on hold. Heading into the meeting, potential further easing from the bank expectations was split. Although the RBA remained on hold at its last meeting, Governor Lowe did signal that further easing could still be warranted in light of weak global conditions. However, disappointingly for AUD bears, the RBA opted to keep rates on hold this time around. This left the headline Australian interest rate at record lows of 0.75% into next year.
RBA Optimistic on Economy
The tone of the meeting statement was generally consistent with the message of recent months. The RBA is content with the positive impact being seen from recent rate cuts. Particularly in terms of the impact on the exchange rate and asset prices as well as the pas through to household incomes. Indeed, the RBA pointed to the “long and variable lags” of monetary policy as a reason for remaining on hold. Essentially, the RBA said that the full extent of the positive impact from recent rate cuts is yet to be felt.
Changes to the Statement
In terms of changes to the statement, while the majority of the bank’s communication was unchanged from last time around, there were a few subtle yet positive changes. The statement noted that:
“while the risks are still tilted to the downside, some of these risks have lessened recently”.
Notably, the statement also no longer referred to as “persistent” downside risks.
On another hawkish note, the RBA stated that the Australian economy reached a “gentle turning point” over the second half of the year and said that:
“expectations of further monetary easing have generally been scaled back as financial market sentiment continued to improve”.
RBA Rules Out QE Yet
These comments are prescient. This is given the recent comments regarding QE made by Governor Lowe. Speaking before parliament, Lowe outlined the circumstances in which further QE would be necessary but highlighted that these conditions are not present in the domestic economy. These comments have essentially quashed any expectations of QE, helping support AUD.
RBA Less Positive on Employment
Not all the changes in the statement were positive, however. The RBA sounded a little less convinced over the strength of employment than it did last time around. The following sentence from the prior month’s statement had been removed: “Employment has continued to grow strongly and has been matched by strong growth in labour supply, with labour force participation at a record high”. Instead, the statement said that “unemployment rate has been steady at around 5 ¼ percent over recent months”.
Trade Deal Still Key
In all, the statement was broadly positive. A reduction in RBA easing expectations is seen which is reflected In the strong rally in AUD. While the US/China trade negotiations continue to present two-way risk, the RBA notes that:
“In China, the authorities have taken steps to support the economy while continuing to address risks in the financial system.”
The rally in AUDUSD this week has seen price moving firmly higher off the .6779 level. Now trading back up towards the bearish trend line from 2017 highs. The next structural resistance comes in just above the trend line at .6916. This means that the area will be a key pivot to watch. If price can break above that zone and use it as a platform for further gains, we could see the start of a broader trend reversal in the Aussie.