Subtle shifts in the land down under

By Steven Levine, Senior Market Analyst, Interactive Brokers

The Reserve Bank of Australia at its monetary policy meeting earlier in February elected to keep the cash rate at 1.5%, where it’s been since August 2016.

RBA governor Philip Lowe noted that Australia’s economy is set to grow by around 3% in 2019 and by a little less than that figure in 2020, mainly due to slower growth in exports of resources.

The growth outlook, he said, is being supported by rising business investment and higher levels of spending on public infrastructure.


Downside Risks

However, Lowe also observed that “some downside risks have increased,” including weaker-than-expected GDP growth in the September quarter on the back of a deceleration in household consumption and income.

Lowe added that the main domestic uncertainty continues to concern the outlook for household spending and the effect of falling housing prices in some cities such as Sydney and Melbourne.

At its recent meetings, the central bank said it has paid special attention to developments in the nation’s housing market, as well as how lower prices may impact construction activity and households’ spending decisions.

The RBA has also considered how the prospects for consumption growth would be affected if household income growth does not accelerate.


Balanced Risks

The RBA concluded that in light of recent data, as well as inherent outlook uncertainties, rate-setting risks have “shifted to be more evenly balanced,” compared to the previous tightening policy bias the bank had held.

The Board said it does not see “a strong case to adjust the cash rate in the near term” and will maintain its medium-term focus.

Marc Chandler, chief market strategist at Bannockburn Global Forex, recently noted that with the shift in the RBA’s position having become “increasingly clear,” it culminated in a cut in its GDP and inflation expectations, which helped drive the Australian dollar to its lowest level in more than a month (~$0.7060).

Technical Indicators

Chandler observed that the RSI is “overextended, but the Slow Stochastics show a bearish divergence and the MACDs crossed lower at the start of last week.”

He added that the Aussie has entered a band of congestion that extends to $0.7000, and while the “surge in the price of iron ore” has done the Australian dollar “little good,” if it ticks higher “some will try to make the link.”  

Against this backdrop, the RBA is slated to release the minutes from its meeting, whereby market participants may receive further clues into the Board’s decision and outlook for the country’s economy.

Photo Credit: Bernard Spragg NZ via Flickr Creative Commons

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