As widely anticipated the Reserve Bank of Australia left the cash rate target unchanged at record low 1.50%. As usual the statement was quite balanced as Philip Lowe wants definitely to avoid fuelling further Aussie appreciation. On the one hand, Governor Lowe acknowledged the improved economic conditions, more specifically the solid growth in employment across all states as well as the continued pick-up in non-mining investment and strong business conditions. On the other hand, the Governor reiterated that the appreciation Aussie over the recent months creates downside inflation risks, adding that “It is also weighing on the outlook for output and employment.”
Overall, in spite of the fact that the statement is mostly unchanged compared to the previous one, the Australian dollar edged slightly higher on Tuesday with AUD/USD spiking at $0.7985 during the Asian session and then stabilised at around 0.7960 in early European session.
It did change the outlook for the Aussie and we believe that a healthy downside correction would be more than welcomed. However, the AUD/USD’s strength is mostly due to a US dollar weakness rather than a strong Aussie, thanks to an uncertain USD outlook. Indeed, investors are largely clueless about the Federal Reserve next move on September 20th, while on the political side Trump keeps failing to persuade Congress to adopt his reforms. Therefore, we think the pair will trade sideways over the next couple of weeks. Also keep in mind that an excessive dovishness from Draghi on Thursday could ignite a broad dollar rally.
By Arnaud Masset