Improving Economic Background Should See RBA on Hold at June 7th Meet

Improving Economic Background Should See RBA on Hold at June 7th Meet

2 June 2016, 15:17
Roberto Jacobs
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Improving Economic Background Should See RBA on Hold at June 7th Meet

RBA surprised the markets at its May 5th meeting by lowering its main interest rate to 1.75% from 2% and cut its Dec-16 inflation forecasts by a full percentage point in its quarterly Statement of Monetary Policy (SoMP). Upbeat data since the May meet adding to the case for the central bank to keep its powder dry at its policy meeting next week. Investors are now giving a mere 6 per cent chance of a follow-up cut next Tuesday, June 7th, from about a 75 percent chance just after the May cut.

Structural changes in Australia away from the mining sector are progressing. Expansionary monetary policy and the weak currency fuelled domestic consumption and industries outside the mining sector. Labour market recovery that started in mid-2015 continues, the unemployment rate fell from 6.3% in early 2015 to 5.7% recently. The RBA in its minutes reiterated its faith in the underlying strength of the Australian economy, and its ongoing rebalancing away from resource-related infrastructure investment.

The data publications over the past few have been upbeat and suggest that the RBA is unlikely to see further need for adjustments. Growth in Q1 was solid at +1.1% q/q, the trade balance for May also looks better. Australia's trade deficit narrowed substantially in April, to AUD1.6bn from a downwardly revised AUD2.0bn in March. The sharp improvement suggests net exports will make a solid contribution to Q2 GDP.

Moreover the PMIs from China released earlier this week did not create a shock either. Also the Aussie has eased further since the meeting in May so that the RBA will now be alright with its inflation projections (target area of 2-3% will be reached net year) and is unlikely to see further need for adjustments. Also, if the Fed hikes rates soon AUD is likely to continue depreciating against USD.

“We see an even stronger case for rates to be on hold at 1.75 per cent in June and July, awaiting the July 2 election and Q2 consumer price index report on 27 July,” said Annette Beacher, chief strategist at TD Securities.

Upbeat data on strong Australian exports lowered market's expectations for another interest rate cut this year, sending the Australian dollar rallying against peers. AUD/USD hit session highs at 0.7269. The selling pressure around the Aussie dollar is now gathering traction, as markets await US ADP employment report followed by speeches by FOMC’s Kaplan, Dudley and Powell. AUD/USD trading at 0.7209 at 1130 GMT. 

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