At its policy meeting today the RBA held the official cash rate steady at 2% for the third month in a row, as expected by the majority of the market. The bank completely softened its stance on the exchange rate, noting that the Australian dollar is adjusting to significant declines in key commodity prices. This is far cry from the bank’s comments on the back of its last policy meeting which suggested that further depreciation in the aussie seems both likely and necessary.
The RBA was also more upbeat on the Australian economy, implicitly highlighting an uptick in business confidence. In its prior statement the bank noted that business capital expenditure in both mining and non-mining sectors were a key drag on private demand, but it removed this line and replaced it with a more cheerful view of the labour market. Stevens stated that “while the rate of growth has been somewhat below longer-term averages, it has been associated with somewhat stronger growth of employment and a steady rate of unemployment”.
The aussie soars
The combination of the OIS market pricing in around a 20% of a 25 basis point rate cut prior to today’s decision, the more upbeat tone on the economy and the lack of harsh words for the aussie resulted in a rally in AUDUSD. This is game-changer for a currency that has been weighed down recently by the RBA’s constant verbal assaults on it, the removal of which and the RBA’s dovish bias could mean that the there’s a glimmer of hope for AUD bulls.
However, there are still a lot of fundamental headwinds facing the kiwi, including increased fears about the health of Australia’s largest trading partner, China, which is fuelling a collapse of commodity prices. There’s also the threat ever-present threat of US dollar strength if the US economy continues to look increasingly primed for tighter monetary policy. Nonetheless, AUDUSD was able to punch through resistance around 0.7300 and then 0.7350 later in the Asia session.