RBA Cash rate: Comments

RBA Cash rate: Comments

The Australian Dollar spiked today as RBA kept rates on hold at 2% and released a seemingly ‘carbon copy’ statement, failing to jawbone their own currency. However whilst traders reacted to what the RBA ‘should have’, by placing a stronger easing bias in the statement, the RBA have always been playing the longer game.

RBA are seemingly happy to letting external factors lower the Australian Dollar

There seems to be a lot of focus on the RBA cash rate in relation to the exchange rate, but RBA do not seem to see it this way. First off we have not seen the Australian Dollar decline following a rate cut since it fell below Parity in May 2013. Since then, each rate cut has been accompanied by a rising Australian Dollar, whilst the accompanying statements have made constant reference to the RBA’s expectation of a lower exchange rate due to falling commodity prices. RBA seem perfectly comfortable to let external forces such as falling commodity prices and a Hawkish FED depreciate the Australian Dollar. They have frequently acknowledged the limitations of a lower cash rate on today’s climate (to save but not spend or invest) and, thus far, lower interest rates have not helped with animal spirits to lift either mining or non-mining investment. In my view RBA are reluctant to lower it again and any future rate cut/s will more likely be fuelled by the FED not raising rates this year.

The cash rate was widely expected to remain on hold at 2% this month but, at the same time, also expected a stronger easing bias than the previous statement. Last month, when traders thought the easing bias had been removed from the statement, the Australian Dollar spikes 170 following the release, eventually appreciating from 0.77c to 0.816 over the next two weeks.

“The Federal Reserve is expected to start increasing its policy rate later this year…”

“Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.”

Traders will now shift their focus over to GDP, Retail Sales and Trade Balance for further clues of the likelihood of a rate cut. It will be Nonfarm Payroll data on Friday which will have the final say, and is likely to push the Australian Dollar lower if it prints over 200k jobs, allowing RBA to breathe another sigh of relief.

ENDS

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