Brief Summary:

  • The Reserve Bank keeps the cash rate at 2.50% with no end to the holding period in sight.
  • Australian data releases were largely positive this week with GDP and Private Capital Expenditure buoying the AUD.
  • The U.S. will release monthly employment data on Friday, just over 200,000 jobs are expected to have been added in May.
  • The European Central Bank is expected to cut their benchmark rate to 0.1% after consumer inflation slips back to 0.5%.

RBA – All talk no action 

Yesterday the Reserve Bank of Australia decided to keep the cash rate unchanged at 2.50%. The AUD reaction was slightly positive as the statement was upbeat on the economy paired with a frugal talking down of the currency. They upgraded their view on the economy adding that, “growth looks to have been somewhat firmer around the turn of the year” as a result of “very strong increases in resource exports as new capacity has come on stream”.  They also removed this line, “The demand for labour has been weak over the past year”, recognising the strong start to 2014 for employment growth.

They expressed a little stronger that the currency was once again trading beyond fundamentals stating, “The exchange rate remains high by historical standards, particularly given the further decline in commodity prices.” This line should have little impact, however, as the threat of a rate cut has been all but removed.
They also noted that “Volatility in many financial prices is currently unusually low. Markets appear to be attaching a very low probability to any rise in global interest rates over the period ahead.” We maintain that the AUD stands to be a major victim of a bounce back in volatility and the resumed prospect of interest rate rises in major economies like the U.S. and U.K.

U.S. Federal Reserve officials share the same concerns over unusually low volatility; summarised by Jon Hilsenrath of the Wall Street Journal in this article. William Dudley of the New York Fed is one of many to express this view speaking last week, “I am a little bit nervous that people are taking too much comfort in this low-volatility period. As a consequence, they’ll take more risk than really what’s appropriate.”

Australian domestic data

05-06-14aAustralia’s first quarter growth and investment figures were released this week. Private Capital Expenditure, detailing planned and actual industry investment, posted a headline figure of -4.2%. This actually boosted the AUD into the weekend as the planned investment numbers were revised up across all industries. Measures of realised investment in mining declined as expected but other industries ticked upward. Other industries are expected to pick up the slack left by declining mining investment levels. The chart to the right shows new expenditure growth over the last few years, the impact of mining (green) on the overall figure (blue) is clearly visible.

05-06-14bGross Domestic Product, the broadest measure of economic growth, showed the Australian economy grew by 1.1% in the first quarter. The figure was buoyed by strong mining lead exports which has been apparent in large monthly trade surpluses. Mining, financial and construction industries were the main contributors to growth. The result is ahead of the RBA’s forecast however, several economists have noted that this strong figure may not continue through the year. Fiscal consolidation from the latest budget is set to increase its drag on growth along with the continued mining slow-down.

Weekly Charts

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Chris Chandler
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