AUD breaks 0.74 after the RBA did not signal further easing intentions
As expected the Reserve Bank of Australia (RBA) left monetary policy unchanged today. However the Australian dollar (AUD) surged by 50 pips to 0.7420 as the RBA statement indicates that the central bank is adopting a wait and see approach and did not provide any further easing bias. The RBA stated that having eased monetary policy at its May meeting, holding the stance of policy unchanged today would be consistent with sustainable growth in the economy and inflation returning to target over time. As a result financial markets pared bets that the RBA may reduce rates in the coming months.
Weak inflationary pressures – RBA to cut OCR by 25bp in August
In our view, there is a case for the RBA to lower the Official Cash Rate (OCR) further this year, most likely in August. Inflation expectations in May declined further from 1.5% to 1.0%. In addition, the construction sector is likely to provide less support to economic growth as house prices become less affordable. Though the unemployment rate in May is likely to decline (job advertisements rose 2.4% mom in May), wage growth is expected to remain subdued. Further gains in the AUD is also likely to weigh on exports in the service sector. Given the current weak US dollar sentiment after the disappointing US payrolls last friday, we do not rule out that the AUD could strengthen further towards this year’s peak of around 0.78 in the coming weeks. We favour fading the recovery in the AUD towards 0.78 with a third quarter target of 0.72.