AUD rally on RBA decision

Brief Summary:

• The AUD rallies on the back of the RBA’s decision to keep interest rates at 2.50%
• The U.S. will celebrate Independence Day on the 4^th of July, cutting the trading week short.

No extra currency comments

Yesterday, the Reserve Bank of Australia again decided to leave the cash rate unchanged at 2.50%. The AUD rallied on the back of the decision even though the statement was basically a carbon copy of last month’s.

The AUD move reveals a few things about market expectations leading into the decision. With no expectation for a policy change and no substantial changes to the statement, we can only assume it was a case of ‘no news is good news’. It is possible that some participants were expecting increased comments on the high exchange rate; this was not delivered. Instead, the usual line was repeated, “The exchange rate remains high by historical standards, particularly given the declines in key commodity prices”. This can be seen to the right where the AUD and the iron ore spot price part ways. The upward trend in the AUD, fuelled by low volatility and carry trades, was therefore supported.

The high currency is of a concern to the Australian economy, however. Today, Australian trade numbers were released that showed the trade deficit increasing to $1.91 billion. The trade balance is a measure of exports less imports and the deficit was largely driven by decreased resource exports. Metal ores and mineral exports declined 9% over the period as a result of falling commodity prices and a higher AUD. Lower net exports become a drag on GDP growth and RBA would prefer a lower currency in order to restart other sectors of the economy. Without a significant shift in policy this will be hard for them to achieve.

USD

Last night, the ISM Manufacturing PMI showed industry expansion continued at a moderate pace. The index measured 55.3 and respondents overall delivered positive news. The data points to another strong round of employment numbers this Thursday. The data will be released a day early due to the July 4^th Independence Day holiday.

Non-Farm Employment Change, the main measure of monthly job growth in the U.S., is expected to post 214,000 new jobs. The ISM Non-Manufacturing PMI will also be released later in the evening.

Weekly Charts

Chris Chandler

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