The Reserve Bank of Australia announced its latest policy meeting decision on Tuesday and kept its cash rate unchanged at the record low of 2.00%. Markets were not expecting another cut this month as the RBA assesses the impact of its previous two 0.25% cuts in February and May. It may also prefer to wait and see how the sharp depreciation of the Australian dollar feeds into import prices and boosts exports before taking further action.
The Australian dollar has fallen by around 31% against the US dollar since the start of the downtrend in April 2013 and by 9.57% since the start of 2015. In its previous statements, the RBA strongly hinted that further depreciation of the currency is ‘likely and necessary’ to compensate for the large declines seen in commodity prices such as iron ore – a key export for Australia. This has driven the aussie lower in the currency markets.
Retail sales released shortly before the RBA statement showed that consumer spending remains healthy, with retail sales up by 0.7% over the month in June, above estimates of 0.4%. Strong consumer demand has also boosted Australian house prices, particularly in Sydney and Melbourne, which has been a concern for the RBA as additional rate cuts would further inflate the property market.
Unemployment has also proved surprisingly resilient as the unemployment rate has edged lower from 6.3% in January to 6% in June. But the official rate may not be accurately representing the rise in the number of under-employed. Slower population growth has also contributed to the fall in the unemployment rate. Though the trend may be reversing as June’s figure was a notch higher on May’s 5.9% rate and data due on Thursday is expected to show unemployment rising to 6.1% in July.
But with commodity prices continuing to weaken and the slowdown in China appearing to be more prolonged than initially anticipated, the RBA is likely to cut rates again later in the year. The RBA has previously emphasised the need to rebalance the economy away from commodity-driven exports to non-resource exports.
Trade data out today showed Australian exports are still a long way off from recovery after the trade deficit reached a record high in April. In June, the trade balance worsened from May, though the AUD 2.9 billion deficit was slightly better than the AUD 3 billion deficit forecast. Even if the aussie was to depreciate further in the coming months, the RBA will be looking at the aussie’s fall against non-US currencies, which has been more restrained but is seen as crucial to boosting non-commodity exports.
The aussie surged against the US dollar after the RBA statement as the change in tone took markets by surprise. The Governor Glenn Stevens made no reference on the need for further depreciation and instead said “the Australian dollar is adjusting to the significant declines in key commodity prices”. The aussie was up by almost 1.5% against the dollar at 0.7387. It also moved higher against the kiwi, climbing to 1.1194 by mid-European session.
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