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RBA shows no sign of rate rise

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Currency Market Update RBA maintains interest rates at 4.75 percent; no sign of imminent rate rise EVENT: The RBA decided at its meeting last week to keep interest rates steady at 4.75 percent for a sixth consecutive month. Mirroring comments after recent meetings, the RBA repeated its belief that its current mildly restrictive monetary policy stance continues to be appropriate. IMPACTS: The announcement initially led to the AUD easing off against the USD before subsequently making up ground to finish trading at $1.0906 - approximately the same level as just prior to the announcement. The RBA continues to give no indication that an interest rate rise is imminent in the next few months. The market was clearly hoping for more of an indication from the RBA as to what direction monetary policy was likely to take, but was left disappointed. Many in the market continue to believe that at least one, and quite possibly two, interest rate rises will occur before the end of the year. CONSIDERATIONS: The RBA noted that employment growth looks set to slow but continue and that skills shortages are only significant in primarily resources related sectors. Continued gradual growth in employment will help to delay future interest rate rises. On the flip side of the coin, the RBA noted that wage rises have returned to levels seen before the economic downturn. This, together with increases in private investment, could lead to inflationary pressures. However, continued caution in household spending and borrowing, coupled with individuals increasing their savings as a proportion of income, will help to mitigate these inflationary increases. The continued strength of the AUD, especially if it continues to trade above parity with the USD, will go some way to further delaying interest rate rises. The AUD continues to be dangerously overbought. It is unlikely that the Aussie will plummet quickly against the USD, but the question is whether it will continue to strengthen or hover in its current range. We would expect the AUD to trade within a band between $1.03 and $1.12 over the medium term. The timing of significant economic recovery in the U.S. will be a key determinant in the fortunes of the AUD against the USD. Noteworthy improvements in the U.S. economy are unlikely to occur before Q3 or Q4 of this year. A key reason for the Aussie’s strength against the Greenback is the weakness of the USD and the overall U.S. economy rather than the underlying strength of the Aussie itself. The upcoming release of retail sales data this Thursday and labour face data next Thursday will help to paint a better picture of future monetary policy direction.

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