RBA Hits Pause Button Before Holidays

According to RBA Governor Glenn Stevens, developments in the global economy have convinced central bankers in the Land Down Under to keep the official cash rate steady at 4.75%. He acknowledged that consumer spending and growth aren’t exactly drop-dead awesome, but he’s still confident that Australia will continue on its path to recovery.

To be honest, I ain’t that surprised that the RBA decided to pause rates this month.
First of all, they already spooked the markets by raising rates last month. It was highly unlikely that they’d do so again.

Secondly, given the recent news that has been hitting the markets, perhaps it is wise to go back to a wait-and-see approach. After all, Australia is highly exposed to China, and as I pointed out in my post yesterday, China has been and will most likely continue to hike interest rates. With tighter monetary policy comes weaker demand, which could hamper Australia’s export industries.

In addition, with all the concerns about more quantitative easing from the U.S. and the European sovereign debt crisis, we could see the global recovery take more hits in the coming months.

In fact, the RBA doesn’t have to look beyond its own shorelines to see signs of trouble. Just a week ago, we saw that the economy grow at its slowest pace in almost two years when the GDP report for the third quarter clocked in at 0.2%. Meanwhile, the retail sales report for October posted its biggest drop since July 2009 with a 1.1% decline, while the unemployment rate jumping to its highest level in 5 months! Perhaps this was reason enough for the RBA to keep rates steady for the mean time.

As for the Aussie, even its immediate price action showed the markets’ lack of expectation for a rate hike. Though AUD/USD initially dropped to .9886, the pair bounced up nicely and began trading higher against the Greenback. Let’s see if the Aussie can sustain its gains this time!

AUD/USD Daily Chart

If you take a look at the daily AUD/USD chart, you’ll see that the Aussie has been gaining on the dollar since late last summer when concerns on the European debt crisis eased up and many European banks passed their stress tests. In fact, it even reached parity thanks to RBA’s surprise interest rate hike in October and news of the Fed’s QE2 program.

But lately it’s looking a lot like the bulls are running out of steam. Weak U.S. fundamentals and a bit of risk appetite might have pushed AUD/USD higher earlier this week, but the pair still has a lot to recover, having plunged from its 1.0184 peak in early November.

If weaker-than-expected economic data continue to stack up in Australia and risk aversion lingers in markets, then we might see the Aussie lose more ground against the dollar in the next few weeks!