AUD/USD, AUD/JPY Analysis: RBA minutes reveal ‘finely balanced’ decision

• The RBA’s decision to hike by 25bp over pausing for another month was ‘finely balanced’
• AUD pairs initially weakened in response, yet the minutes remind us of the RBA’s data dependence and concerns over inflation
• Australian wage data on Wednesday and employment on Thursday remain key data points
• AUD pairs also lower following weak China data
• AUD/JPY suggests a swing high has formed within a larger triangle
• AUD/USD shows the potential to retest 0.7100 despite the selloff

The RBA considered pausing at their latest meeting, according to the RBA minutes released today. This saw AUD pairs promptly move lower in a knee-jerk reaction, as it unwound some confidence that the RBA were indeed on a more hawkish path. Yet whilst the decision was deemed ‘finally balanced’, the RBA opted for the hike due to the tight labour market and ‘significant’ inflationary pressures.

But the Aussie was dealt another blow shortly after, thanks to a weak set of data from China. Industrial production, retail sales and fixed asset investment all came in below expectations, which means data for Q2 GDP remains well below par.

Having gone through the minutes, the RBA seem to be hedging their bets. On one hand they note consumption is slowing, inflation has peaked and (slower) wage growth remain consistent with their inflation target, with ‘liaison contacts’ suggesting wages pressures were stabilising. Yet on the other hand, concerns of elevated services inflation, inflation was too high and not expected to reach their band until 2025 and upside risks prevail from a tight labour market, strong population growth / low vacancy rates and weak productivity growth.

All in all, I continue to suspect the RBA intends to hike as little as possible and are crossing their fingers that strong economic data recedes to provide them with more breathing room to pause. And that very much puts tomorrow’s wage data and Thursday’s employment report on the radar, as a strong pickup in both could increase bets that the RBA are on track for another (reluctant) hike.

AUD/USD 15-minute chart:

The Australian dollar is still dusting itself off from the weak China news, but it has found support around the daily pivot point and HVN (high volume node) from the previous consolidation. It’s possible we may have seen the low, in which case today’s low is a higher low relative to the 0.6674 low and we could see the Aussie return back above 0.6700 and have another crack at 0.67100.

Of course, a weaker US dollar would certainly help. And if talks between Biden and McCarthy take a turn for the better it could prompt a risk-on rally to the benefit for AUD/USD.

AUD/JPY 1-hour chart:

Prices on the AUD/JPY 1-hour chart are converging and forming a triangle pattern which it seems hesitant to break out of for now. The combination of weak China data and concerns of a US default are capping its upside potential for now, and China’s data dump saw a momentum shift lower at the cycle highs.

Notice that the reversal has occurred around the current month’s level of highest trading volume (91.15), near trend resistance. A small bearish divergence formed ahead of the reversal and is on the cusp of moving below 50, whist prices trade below 91.

Given the high volumes around resistance levels and weak China data, the bias is for further losses over the near-term and a move towards the lower trendline, with 90.50 and potentially 90.13 on hand for potential support levels along the way.

Notes from the RBA’s May minutes:

Members discussed two options: holding the cash rate unchanged; or increasing the cash rate by 25 basis points.

The case for holding the cash rate unchanged rested on several arguments.

• Inflation had peaked and was showing signs of slowing further

• inflation could return to the centre of the inflation target band earlier than forecast
• Wage growth was stabilising
• The outlook for consumption was weak and had been revised a little lower in the near term
• Many households were experiencing significant financial pressures
• Subdued growth in consumption was expected to lead to a moderation in inflation
• The forecast increase in unemployment could result in inflation slowing more quickly than expected

On the other hand, there were several arguments supporting an increase in the cash rate.

• Inflation was not expected to reach the top of the target band until mid-2025
• There’s little room for upside surprises to inflation
• Like other countries, Australia could experience higher levels of services inflation
• Rents grow even faster than the central forecast envisaged (strong population growth and low vacancy rates)
• Productivity growth remains very weak (which could lead to higher labour costs)
• A prolonged period of high inflation leads to a shift in inflation expectations
• The pause in April may have contributed to higher house pries and lower Australian dollar
• March data presented strong employment growth, higher rate of services CPI in Australian and overseas

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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