RBA minutes UPDATE

As suspected, the RBA's broadly neutral commentary was interpreted as hawkish, leading to AUD gains across the board.

The full text from today's RBA minutes can be viewed here

Highlights

1. Members opened their discussion with the observation that the main driver of financial markets over the past month had been the reappraisal by the markets of the future path of monetary policy in the United States.
2. "Overall, domestic financial markets viewed the lower exchange rate as reducing the need for monetary policy to be eased further, with the market at the time of the meeting attaching a 25 per cent probability of a decline in the cash rate occurring in July, with only a single reduction expected by the end of the year"
3. "Recent data suggested that domestic economic activity continued to grow at a below trend pace"
4. "The effects of lower interest rates were apparent across a range of indicators and, given the lags involved in the transmission of monetary policy, this process had further to run"
5. "....inflation remaining consistent with the medium-term target"
6. "Given the exchange rate adjustment that was occurring, and with the substantial degree of monetary stimulus already in place, members assessed the current stance of policy to be appropriate for the time being"

Market reaction

As we suspected, today's RBA minutes were interpreted as hawkish in real-terms considering the extreme bias towards accommodative policy by the majority of market participants. The high level of AUD shorts in the market also added to upward momentum for AUD pairs as skittish speculators ran for the exits. AUD has rallied across the board and consolidated.

Outlook & Analysis

Today's minutes show that the RBA is not as convinced about an August rate cut as speculators are. From the commentary, its clear that the RBA's outlook is more balanced than what the market is pricing in. The RBA sees monetary policy lag and AUD weakness as factors that require time to take effect. This also adds doubt to the argument that an August rate cut is certain. Additionally, its important to note that the RBA is looking at external factors such as Fed policy and China, with as much siginifance as domestic factors. This makes complete sense considering that the Fed reversed course on its tightening plans; the RBA may see additional Fed stimulus as a factor that removes the need for further easing domestically. In the past, quantitative easing by the Fed has tended to help commodity currencies such as AUD.



Looking forward, the extent of the AUD reversal is now the focus. A classic short-squeeze in AUD/USD is now in progress. A key test of the AUD's resolve is at 0.9260 (short-term trend line). Overall, the RBA minutes show that an August rate cut is far from certain given domestic and external conditions, therefore, expectations for an August rate cut are likely to be scaled back. This should prove AUD positive in the short-medium term subject to further macro data coming out of Australia contrasted against Fed policy and China's economic performance.

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Commissioned by Think Forex

Written by George Tchetvertakov

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