the rba wont risk sparking a rally in aud 1729502015

The Reserve Bank of Australia (RBA) released it minutes from its policy meeting earlier in July which showed that the bank remains on the sidelines. At its policy meeting at the beginning of the month the bank left the official cash rate at 2.00% for the second month in a row, after two 25 basis point cuts earlier in the year. Prior policy loosening was in response to lacklustre business expenditure and a soft outlook for the labour market, and while not much has changed yet the bank doesn’t want to waste ammunition.

The RBA noted that recent volatility in Chinese equity markets and the threat of a Grexit required close monitoring, but there’s no sense that the bank has its finger on the trigger anymore. The minutes don’t convey the same degree of urgency from broad members that was present earlier in the year, thus we think the bank will remain in wait-and-see mode for the time being. A deterioration of the outlook/s for inflation and/or growth, a significant rise in the Australian dollar or increased turmoil in global financial markets could push the RBA to loosen monetary policy further, but this isn’t our base case. The unemployment rate hasn’t fallen off a cliff, although this is more due to slowing population growth than domestic economic conditions, and headline GDP growth is better than its commodity-based peers, like Canada and NZ.

Nonetheless, some significant economic data out of Australia this week may help to clear the outlook for interest rates, with Q2’s CPI numbers due out on Wednesday (1130AEST). The market is expecting headline inflation growth to increase 0.8% q/q and 1.7% y/y, beating Q1’s numbers. However, core inflation is expected to have slowed last quarter to around 2.1% y/y from 2.3% y/y, just within the RBA’s 2-3% target range. If the pace of inflation slows any further it would likely force the RBA into a more dovish stance, while a pick-up in consumer prices may drown out calls for looser monetary policy in the near-term – the market puts the prospect of at least one more 25bps cut this year at around 60%.

AUDUSD

The bank still believes the AUD should fall further against a long-term decline in key commodity prices, partly because it doesn’t want to risk triggering a rally in it by changing its stance on the commodity currency. This is broadly in line with most expectations from the market, but we are concerned about the likelihood for a rally if the RBA completely removes its easing bias. Nonetheless, the combination of long-term USD strength and medium-term AUD weakness should keep AUDUSD depressed.

In the short-term, all eyes are on Wednesday’s CPI numbers amidst the appearance of some technical indications that price may have found a bottom around 0.7350. There’s bullish divergence between price and RSI on a 4-hr chart; above 0.7450 we’re eyeing 0.7500 and then 0.7545.