Doves still in charge at the RBA

Reserve Bank of Australia (RBA) June 4th meeting minutes – Recap, analysis and forward outlook.

Earlier today, the Reserve Bank of Australia (RBA) published minutes of their June 4th policy meeting where rates were unanimously left on hold at 2.75%.

Some interesting points were took from the minutes were:

• The RBA said the inflation outlook might give some scope to cut rates
• The June 4th meeting was the day prior to the release of Q1 national accounts, which were considerably weaker than expected, particularly on household consumption and domestic demand
• The discussion of inflation suggests there is only an outside chance of a change in the inflation outlook precluding a further move in interest rates.
• The RBA said the recent slowdown in wages growth “would help contain inflation as the exchange rate depreciated”
• AUD/USD is currently trading at 0.95 (on June 4th AUD/USD was trading at approximately 0.96) so in terms of the Australian Dollar, not much has changed to suggest AUD is weakening significantly enough to warrant a change of rate expectations in the short-medium term

In summary, we see a higher probability of further interest rate cuts by the RBA sometime this year or in 2014. Interest rates are already at a record low of 2.75% so an ultra-low rate environment looks like it’s here to stay in Australia after enveloping the majority of the G20 back in 2008/9.

It is worth noting that AUD/USD is trading close to record highs despite the extensive sell-off since mid-April of this year.

Daily candlestick chart showing AUD/USD change since 1999

We are much closer to record highs (1.10) than we are to record lows (0.47) and yet the interest rate outlook suggests narrowing yield differentials between Australia and the rest of the G20. Consequently, we see a strong chance of continued across-the-board AUD declines as investors recognize a diminishing incentive to hold AUD in favour of other currencies.

The upcoming schedule of RBA meetings is as follows:

July 2nd 2013
August 6th 2013
September 3rd 2013
October 1st 2013
November 5th 2013
December 3rd 2013

We think the RBA will look to August or September as the date for the next 25bp rate cut. The chances of a cut on July 2nd are remote at this stage but do bear in mind that we have pivotal G8 and Federal Reserve meetings this week – both have the potential to change the financial landscape altogether so the RBA’s hand could still be forced – just not by the Australian economy, but rather, from overseas factors.

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Commissioned by Think Forex

Written by George Tchetvertakov

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