FX comment – AUD supported as RBA keeps monetary policy unchanged

by: Roy Teo

 

  • RBA keeps monetary policy unchanged for now…
  • … RBA to cut OCR by 25bp to 1.75% in early 2016
  • Weaker AUD expected

 

RBA keeps monetary policy unchanged for now…

As widely expected, the Reserve Bank of Australia (RBA) left monetary policy unchanged this morning. The RBA stated that inflation will remain low with the economy likely to have a degree of spare capacity for some time. Hence the outlook for inflation may afford scope for further easing of policy should that be appropriate to lend support to demand. On the exchange rate, the RBA reiterated that the AUD is adjusting to the significant declines in key commodity prices. The prospects for an improvement in economic conditions have firmed a little over recent months and that leaving monetary policy unchanged was appropriate.

… RBA to cut OCR by 25bp to 1.75% in early 2016

We maintain our view that the RBA is likely to lower the Official Cash Rate (OCR) by 25bp in early 2016 as economic growth remains below trend rate and inflation is expected to ease lower. Though net exports contribution to GDP rose in the third quarter supported by a weaker exchange rate, the decline in imports suggests that domestic demand remains weak. In addition, despite company profits in the third quarter rising stronger than expected, profits in the non-mining sectors declined. This reflects an uneven recovery in the non-mining sectors. The weaker than expected business investments plans reported last week also does not bode well for economic growth in the coming months. Furthermore, housing auction clearing rates have declined by about 15% since the end of the third quarter. This implies that house price inflation is expected to moderate further. This is expected to weigh on non-tradable inflation. Last but not least, the divergence between Australia’s key commodity export, iron ore prices and the AUD has increased in recent months.

Weaker AUD expected

In the short term, the technical outlook in the AUD remains positive. However short term technical indicators imply that the AUD is in overbought territory. Hence the AUD is unlikely to breach 0.73 level ahead of tomorrow’s Q3 GDP print. Looking ahead, as financial markets have not fully priced in the divergence in monetary policies between Australia and the US next year, we expect the AUD to ease lower to around 0.62 by the end of 2016.