(04 JULY 2017)DAILY MARKET BRIEF 1:RBA backs away from reflation trend

As expected, the Reserve Bank of Australia kept its cash rate unchanged at 1.50%. Despite the widely-held view for no change, there was still a level of disappointment that the RBA refrained from discussing “normalisation” or offering a hawkish lean. We see this meeting as a warning to other central banks normalisation bull, such as those in CAD not to get too far ahead of economic data.

Governor Lowe acknowledged pick-up in external growth dynamics and improvement in domestic economy. The central bank removed the reference to GDP expanding slightly above 3% suggesting that growth forecast could be revised lower. The RBA noted that the inflation rate has fallen in response to weaker crude prices and stagnating wage growth. We see the RBA maintaining a neutral tone for the near-term as increasing household debt without catchup from wage growth could threaten financial stability should the RBA start tightening.

We remain bearish on AUD as believe the market is overpricing the central bank’s rush to reflation story and rising funding cost will remove the AUD shine.

By Peter Rosenstreich