The Reserve Bank of Australia (RBA) maintained interest rates at 2.00% as expected but decided to make significant changes in its official statement. Here’s what forex junkies like you and I need to know.
On commodity prices
In their March statement, RBA Governor Glenn Stevens and his gang of policymakers acknowledged that commodity prices have “declined very substantially over the past couple of years” partly due to lower demand and increasing supply. This time around, RBA officials assessed that commodity prices have “generally increased a little recently”
On global financial market volatility
Back in March, RBA policymakers noted that “financial markets have once again exhibited heightened volatility over recent months” and that “appetite for risk has diminished somewhat.” While they maintained that uncertainty surrounding the global economic outlook and monetary policies is still present, policymakers acknowledged that “sentiment in the financial markets has improved recently” in their April statement.
In addition, the statement’s conclusion no longer contained the earlier phrase on monitoring the impact of the financial market turbulence on global and domestic demand. Instead, it indicated that the policymaking committee would look into new data on inflation and labor market conditions to decide whether easier policy is warranted or not.
On domestic rebalancing
When it comes to the ongoing shift from a mining-led performance to a non-mining one, the Australian central bank suggested that the rebalancing is proceeding well. RBA officials already discussed how the non-mining parts of the economy have strengthened back in March while mining investment has contracted.
In their current statement, the RBA mentioned that this rebalancing has continued and resulted to positive developments in the labor market, as well as a pickup in overall GDP growth. Central bankers also emphasized that the pace of lending to businesses has picked up.
It looks like inflation is still a pressing concern for the RBA, as it has been so for most central banks all over the globe. Both their March and April statements noted that inflation is “quite low” and that growth in labor costs remain subdued. Policymakers also predicted that inflation in Australia is likely to remain low “for the next year or two.”
On AUD appreciation
Interestingly enough, the April RBA statement contained a whole new paragraph on the Australian dollar’s forex appreciation compared to their previous statement, which simply noted that the “exchange rate is been adjusting to the evolving economic outlook.“ At that time, AUD/USD had been trading around the .7200 levels.
This time, with AUD/USD just recently testing the .7700 handle, RBA officials pointed out that the Aussie “has appreciated somewhat recently.” The statement went on to indicate that this was a product of rising commodity prices and monetary policy easing elsewhere in the world. More importantly, policymakers warned that an “appreciating exchange rate could complicate the adjustment underway in the economy.”
Initial AUD forex reaction
The Aussie made a quick forex rally during the RBA statement, as forex junkies zoomed in on the more upbeat assessment and outlook for the Australian economy. After all, RBA officials seem more confident about the pickup in commodity prices, the state of global financial markets, and the progress in domestic rebalancing.
However, the Aussie took a few steps back as forex market watchers heard a bit of jawboning. While RBA head honcho Stevens didn’t exactly mention that they’re willing to step in the currency market to rein in the Aussie’s gains, traders must’ve also priced in the potential negative impact of the Aussie’s recent appreciation on the Land Down Under’s economic performance, particularly when it comes to trade activity. Keep in mind that the country’s trade balance was just released a few hours ahead, and this report showed a much wider deficit than expected due to a 1% decline in exports.
All in all, the latest RBA statement is still relatively upbeat compared to their earlier ones and to those of other central banks. With that, the Aussie might stay supported against most of its forex rivals, although its gains might be limited to the nearby resistance levels as traders stay wary of additional RBA jawboning.