AUD Craters As RBA Keep Rates On Hold Citing Labor Market Concerns

At their April monetary policy decision, the RBA kept rates on hold at record lows of 1.5%.

Key Points From the Statement

• Global economy continues to improved;
• Maintaining rates at current levels is consistent with growth and inflation targets;
• Strong commodity prices are providing a significant lift to Australian national income;
• Australian economy is continuing the transition from mining investment boom- [Check our infographics];
• Recent data is consistent with moderate growth;
• Some employment indicators have softened;
• Unemployment rate has increased slightly;
• Recent supervisory measures should help deal with the risks associated with rising indebtedness;
• Reduced reliance on interest only housing loans would be a positive development;
• House prices rising strongly in some markets;
• A rising AUD would complicate the economy’s transition away from mining;
• The pickup in underlying inflation is expected to be gradual.

There were two key changes in this month’s statement:

• The commentary regarding the domestic economy is a little less optimistic with the momentum in growth described as “ongoing moderate growth”. The commentary around the labourlabort is equally subdued with the RBA acknowledging weakness in certain indicator as the unemployment rate has increased and employment growth has remained modest. Forward-looking indicators point to continued growth though the phrase “still point” suggests that the bank is not thoroughly convinced that this will continue. The governor also noted that “wage growth remains slow”

• Significant attention is also given to the housing market this time. Although the governor continues to highlight that conditions vary regionally across the country, Bill Evans talked for the first time about the “risks associated with high and rising levels of indebtedness”. The minutes of the March meeting referred to a “build-up of risks associated with the housing market” and this month’s statement places further emphasis on this issue. In the March statement, the RBA opted that “supervisory measures have contributed to some strengthening of lending standards”. This time around, the RBA have gone further and declared that “lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions” including “a reduced resilience on interest only housing loans”. This is a much stronger, more direct statement which paves the way for increased pressure on the banks from regulators.

In terms of FX, again, the central bank highlighted that a rising AUD would complicate their outlook. However, the AUD forecast appears somewhat softened now with the Fed having raised rates and on course to raise rates further over the year alongside a softening in iron ore prices.

Market Reaction

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The market reaction saw an orderly sell-off in AUD as traders reacted to the less upbeat tone of the statement. While the RBA have maintained rates at current levels since the last 25bps reduction in August 2016, hawkish expectations have been dialed back in response to this meeting. The RBA are in a difficult place, caught between still-rising house prices and still-rising levels of household debt. Indeed, with unemployment ticking back up the RBA would most likely prefer to cut rates a further 25bps if it weren’t for the surging housing market in eastern states.

Technical Perspective

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AUDUSD remains range bound within the broader contracting triangle pattern that has framed price action since spring of last year. Having recently tested trend line resistance, price now looks to have started a fresh rotation lower. The .75 level will now be a key pivot for assessing short-term direction. A break below opens up the way for a run down to the bottom of the consolidation structure while a bounce at that level will keep the focus on the upside.