Just shy of being hawkish, the minutes revealed further confidence in the global and domestic economy, yet the usual suspect remain which are likely to cap any reason for a hike.
The RBA continued to acknowledge the positive developments with the employment sector which gave a slightly hawkish tone to the statement. This was carefully balanced with a reminder of low wage growth and inflation, yet as this is not new information traders took it as a net positive to send AUD broadly higher. The minutes provided just enough juice to break above Friday’s and the 2016 high where the currency is now poised to test 79c and likely head for 80c.
Released alongside the minutes were June’s motor vehicle sales which softened from 4.9% YoY to 3.6%. Whilst this was below expectations, the underlying volume of sales hit a record high and this marks the 4th consecutive expansion.
After breaking above the 2016 high AUD is now on a mission to test 79c. There is a tight zone of resistance between 0.7917-23 which may lower the odds of a runaway move initially, but the conditions are ripe for this breakout to not turn into a bull trap.
Several correlations point to AUD remaining supported although we are dubious the fundamentals fully justify recent gains. The gap between AU-US 2yrs is closing as the spread is finally moving higher, yet the trend still points lower which may add pressure onto the rising AUD. Higher copper and wheat prices have also tracked AUD higher these past few weeks to confirm the move so unless employment throws a curve ball in Thursday, AUD is likely to remain firm whilst USD remains on the back ropes. In fact, it appears to be more of a commodity play than a bond market play that has sent AUD hurtling higher.
As data is light from the US overnight it could be positive sentiment for the Dollar which supports the move from here. We doubt employment will disappoint as leading indicators suggest continued strength for the foreseeable future. In particular, capacity utilisation hints at lower unemployment which will be a positive development.
RBA Assistant Governor Guy Debelle speaks on Friday, which may be of interest if he opts to use the session to jawbone the currency. The Australian Dollar has been a main beneficiary of US Dollar weakness with added support provided by firmer copper and wheat prices in recent weeks.
Read the full RBA minutes from the July 2017 meeting
- GDP growth in the March quarter had slowed, largely reflecting temporary factors
- Quarterly growth was expected to have increased in the June quarter
- Labour market conditions had improved since late 2016
- Labour cost pressures remained subdued
- Wholesale electricity prices had risen sharply over the first half of 2017
- Estimates of the neutral real interest rate for Australia suggested that monetary policy had been clearly expansionary for the preceding five years or so.
- Reduction in risk aversion and/or an increase in the potential growth rate could see the neutral real interest rate rise again
- Broad-based recovery in the global economy had continued
- There were still risks to consumption growth should household income growth remain subdued, particularly given the high levels of household debt
- Recent improvement in labour market data had been a positive development
- Recent labour market strength had removed some of the downside risk wage growth forecasts
- Developments in the labour and housing markets continued to warrant careful monitoring
