The RBA Chose Words Very Carefully As Bank Keeps Rates Unchanged

As expected, the RBA left the official cash rate unchanged at 3.5%. In its accompanying statement, the RBA returned to a well-trodden path of domestic strength versus international weakness. Unsurprisingly, the lack of clear direction from the RBA created some fairly choppy conditions for aussie investors, with AUD/USD initially testing a significant resistance level around 1.0600, before price action completely retraced.

Overall, the statement by RBA Governor Stevens was, in the spirit of the bank, fairly vague. The Governor failed to tell the market anything that it didn’t already know. However, this is to be expected considering it has been broadly the same story driving RBA decisions for the entire year: domestic outlook vs. global outlook.

In some cases the generally weak levels of growth offshore have combined with poor domestic data to create the perfect conditions for a cut to the official cash rate (OCR), such as the bank’s April meeting where the board decided to cut the OCR by 50bps. In fact, this theory is what many investors were using just a couple of weeks ago to predict another cut by the RBA today, but they were disappointed by the recent run of positive domestic economic data.

At today’s meeting, it was made clear the bank is in a wait-and-see mode. In particular, the board wants to assess the impact of previous rate cuts before acting again. This is understandable considering domestic data indicates the board shouldn’t be in any hurry to act, especially inflation which appears to be stalling around the bottom of the RBA’s target range (which may provide scope for the RBA to cut but only if it is backed-up by weakening domestic data and/or a deteriorating economic situation offshore). Hence, the RBA may remain on the sidelines next moth as well, unless there is a significant deterioration in global economic conditions.

Elsewhere, markets were very quiet in the lead-up to the RBA decision. And, there were no headline data releases apart from NZ’s labour cost index (actual +0.5%, exp +0.6%) and AIG’s construction index (actual 32.6, prior 34.8). Neither data release proved to be market moving.

As explained earlier AUD/USD didn’t react heavily to the RBA’s announcement, neither did any currency pair for that matter. But EUR/AUD managed to break through a key support level around 1.1700, albeit monetarily. Clearly the market is nervous of moving the pair too far in Asia when so much of its focus is elsewhere, but today’s price action somewhat confirms our earlier theory that EUR/AUD may be overpriced.

Investors are now waiting for data out of Switzerland, including FX reserves and CPI data. Later on, the headline data releases are manufacturing figures out of the UK and building permits out of Canada.

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