Aussie Strength Defies RBA, How Long Will the Central Bank Stay Pat?

Aussie Strength Defies RBA, How Long Will the Central Bank Stay Pat?

The Reserve Bank of Australia, in minutes of its April 5 meeting where interest rates were left unchanged at a record-low 2 percent, noted the economy’s 3 percent expansion in 2015 was better than forecast and “broadly consistent” with last year’s improved jobs market. The nation's key metric of unemployment has declined to a 2-1/2 year low of 5.7 percent and business confidence and conditions surged.

Minutes noted that growth in net service exports, which was consistent with the pronounced increase in short-term visitor arrivals, had contributed around ½ percentage point to 2015 GDP. Members observed that this component of GDP was one of the most sensitive to changes in the exchange rate and discussed the impact of exchange rate movements on the economy more broadly.

The minutes show the board felt an overly strong and appreciating exchange rate could complicate progress in activity rebalancing towards the non-mining sectors of the economy. Key point worth noting is that the RBA says the Aussie dollar “could” complicate, not “is complicating”. Minutes said continued low inflation would provide scope to ease monetary policy further, should that be appropriate to lend support to demand. At this point the RBA doesn’t believe either of these pre-conditons to a cut have yet been met.

Australia's first-quarter inflation is scheduled for release on April 27. Rising exchange rate and the low level of inflation globally could mean Australia's inflation will likely remain low over the next year or two. But given the rebound in commodity prices, unemployment falling slightly to 5.7% in March, and the economy growing at 3%, even a weak CPI print next week is unlikely to drive the RBA to cut rates in the near term.

"Given the broad strength in the domestic economy, we believe the RBA is highly unlikely to cut rates at its next meeting in May." said ANZ in a report.

Traders have pushed out bets on a rate cut and are pricing in just a 17 percent chance of an easing at the RBA’s May meeting. The Australian dollar climbed to its highest level in 10 months against its US counterpart this morning. AUD/USD was trading at 0.7773 at 0920 GMT. RBA Governor Glenn Stevens is speaking tonight in New York and, his speech will be closely watched. Stevens has the potential to “jawbone the currency lower.”

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