One Word Change to RBA Statement Prompts Inference of Dovish Shift

Hint of further accommodation followed negative Housing and Trade data

The insertion of a single word of certainty in the final paragraph of the RBA March 1 rate statement pointed to an increased probability of the RBA increasing easing measures.

Instead of saying that, “Lower inflation conditions ‘may’ provide scope for easier policy,” as it did in February, the RBA replaced the word “may” with the more unambiguous “would” in the March statement.

ANZ bank noted the tweak and said they were reluctant to completely “discount the change”:

“There was a small change to the wording in the final paragraph which could be significant. The RBA noted that “continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand” rather than “may provide scope”. Perhaps there is nothing in this, but tweaks in the language, especially in the last paragraph, are likely to be very carefully considered. So we are reluctant to completely discount this change.”

Analysts at Citi also noticed the change, however, they saw a similar tweak in the language around labour conditions, which offset, in their view the may-would change:

“The policy statement was almost unchanged, although the bank seems to be implying a moderately stronger conviction that inflation is likely to stay low. The last sentence of the statement says “Continued low inflation conditions would [previous: may] provide scope for easier policy, should that be appropriate to lend support to demand. However, the board also noted that the improvement in labour conditions has continued and did so by removing the qualifier “recent” from the statement.”

The RBA statement was also more unequivocal about the decline in commodity markets, saying:

“Commodity prices have declined very substantially” which replaced February’s: “Commodity prices have declined further, especially oil prices.”

Overall changes were not seen as material, by most analysts, however, with Citi sticking to its view of no-change on the horizon:

“In all, we do not see the change in the policy statement language as a strong sign of imminent rate action.”

The overall thrust of the statement appeared to be that the RBA were still monitoring global economic risk factors and their potential impact on the Australian economy, in a similar way to the ECB monitoring ‘pass-through’ on inflation and the Fed whether U.S growth had been impacted by outside influences.

In their response Barclays concisely summed up this view:

“As such, we continue to believe that the RBA will closely monitor the improvement in labour market conditions and the economic impact of the ongoing turmoil in global financial markets.”

Labour market was also key for Barclays, in terms of future RBA action:

“That said, we will closely review the February labour market report scheduled for release on 17 March to assess whether the downside surprise in the January print was due to volatility.”

Despite the dovish inference the AUD/USD exchange rate actually rose by 13 points in the 5 mins following the release, rising from 0.7117 to 0.7130.

0.75 AUD/USD key line-in-the sand

Citibank’s FX team see 0.75 in the Aussie U.S pair as the principle threshold, which if superseded would cause RBA concern:

“Citi Analysts still believe that the RBA will keep the cash rate target unchanged at 2.00%. Despite rising by roughly 2 US cents since the last Board meeting, Citi Analysts still see the AUD as below the threshold of $US0.75 that would signal more concern from the RBA.”

Hawkish Responses

Dennis De Jong, Managing Director at UFX.com saw more of a bias towards the bank raising the rates rather than cutting them:

“Uncertainty in the Chinese economy, along with a white-hot Australian housing market, could have been enough to prompt Reserve Bank governor Glenn Stevens into an interest rate rise.” 

He highlighted volatility as potentially causing a move either way:

“With so much volatility both at home and globally, the Australian economy could go either way over the course of the year ahead, with some economists predicting that the rate may even go lower before it rises again.”

Building Approvals Sink Like a Stone

Building Approvals Data for the month of January was also released on Tuesday March 1, a few hours before the RBA statement, and showed a significant decline in Approvals, from 9.2% mom in December to -7.5% in January, and -2.5% yoy in January 2015 to -15.5% in 2016 – in both cases the fall was also well below expectations of -3.0% and -8.5% respectively.

The Aussie to U.S rate declined by 11 points from 0.7133 to 0.7122 in the 5 minutes following the relase.

ANZ bank saw the fall in approvals as conjuring a negative omen for the labour market going forward:

“Today’s data highlights the risk that the Australian economy is unlikely to be able to rely on building construction to support jobs growth and economic activity for much longer. In contrast, stronger house price data and auction clearance rates suggest that the housing sales market has started 2016 on a positive note.” 

Commenting on the details of the data, ANZ said further:

“This is the weakest year-on-year growth since 2012, when house prices were falling by 5% in annual terms. This result largely reflects a drop-off in higher-density housing approvals, which were more than 25% lower in the year to January.”

The data also showed Non-residential property also suffering:

“Non-residential building approvals were also weak in January.”

On the other hand, house prices remain robust:

“In contrast, today’s house price data reflects a market that has started 2016 a lot better than it finished 2015. Amidst the recent commentary around the potential destabilising impact of changes to negative gearing policy on housing and speculation about

Australian house price stability, strong underlying demand for housing has supported housing sales activity and price gains.”

AUD Exports Lose Value and Suffer from Stuttering Demand

Australian Current Account data, which measures total incomings and outgoings for the entire economy, were also released on

Tuesday March 1 and showed a modest widening of the deficit to AUD21.1bn (5.1% of GDP) in Q4.

This was driven by a widening in the trade deficit, the difference between imports and exports and an important component of the current account, from AUD7.3bn to AUD9.9bn in Q4.

AUD/USD fell by 11 points following the release, although it came out at the same time as poor housing data making it difficult to ascertain which of the two had caused the drop.

According to a note in response to the release from ANZ bank, the value of resources exports declined the most in Q4:

“The value of exports declined 3.2% q/q in Q4, after increasing 5.8% q/q in Q3. The fall was driven by a decline in the value of resources exports (-7.7% q/q). Manufactures and other goods exports also declined 1.4% q/q.”

Both falling prices of exports and falling volumes weighed.

The volume of exports in “other mineral exports and metals,” however “bucked the trend,” and actually rose:

“The volume of other mineral fuels and metals (excluding non-monetary gold) bucked the trend, increasing by 14.3% q/q and 12.0% q/q, respectively. Other mineral fuels rose 19.7% y/y, reflecting the ramp-up in LNG export volumes.”

The value of imports meanwhile remained steady.

ANZ further pointed out that terms of trade deteriorated:

“The terms of trade continued to fall, down 3.5% q/q in Q4 to be 34% below the peak reached in Q3 2011.”

Analysts at ANZ also forecast the Trade Deficit looks to widen in 2016:

“Looking forward, the trade deficit looks set to widen over most of 2016 before narrowing on a basing in commodity prices and as LNG export volumes ramp up.”

Net Income deficit also expected to widen over the next few years.

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