The Reserve Bank of Australia’s minutes from its policy meeting earlier this month showed us that members considered loosening monetary further this month, but it was decided that more data was needed and it would take some time for the economy to respond to an earlier cut in the OCR. It’s also clear that the RBA is nervously watching the housing market; it is acutely aware that softer monetary policy is helping to fuel the red-hot residential housing market in Sydney and, to a lesser extent, Melbourne.
The key lines from the minutes are:
On interest rates
• “On the basis of the current forecasts for growth and inflation, members were of the view that a case to ease monetary policy further might emerge”.
• “In considering whether or not to reduce the cash rate further at this meeting, members saw benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier change. They also saw advantages in receiving more data to indicate whether or not the economy was on the previously forecast path”.
• “… further easing over the period ahead may be appropriate to foster sustainable growth in demand while maintaining inflation consistent with the target”.
On the housing market
• “In Australia, risks in the household sector continued to be centred on housing and mortgage markets”.
• “Members noted that, at the margin, the recent decline in interest rate could boost the housing market, including prices”.
On the labour market
• “The evidence suggested that labour market conditions were likely to remain subdued and the economy would continue to operate with a degree of spare capacity for some time. As a result, wage pressures were expected to remain contained and inflation as forecast to remain consistent with the target over the next year or so, even with a lower exchange rate”.
The big takeaway is that the RBA firmly retains its easing bias and the market appears justified in pricing at least one more 25 bps cut to the OCR in coming months. The other thing to note is that the RBA is hinting that even a lower exchange rate, which was thought to be a possible golden goose for the Australian economy, isn’t enough to push GDP growth back to trend or inflation much higher in the near-term. If AUD continues to slide, expect the RBA to quickly change its tone – a falling Australian dollar supports exports while increasing price pressures from imports, which is potential double-hit for growth and inflation.
AUDUSD plummeted on the back of the minutes due to the bank’s admission that it seriously considered cutting interest rates earlier this month. This increases the likelihood of rate cut further down the track, which is bad news for AUD. With this firm easing bias intact and the fact that the FOMC is looking increasingly like it will raise rates around the middle of the year, it’s a lot of weight for AUDUSD to carry, thus our fundamental bias remains lower.
From a technical perspective, AUDUSD is looking a little oversold, but it remains in an overall downward trend. There is some bullish divergence between price and RSI on a daily chart which suggests that the sell-off may be losing momentum, but we would need to see it break out of its downward channel before getting bullish.