It’s well known that a higher exchange rate is a headache for the RBA, so AUD’s break of 80c made this a core focus of today’s statement.
The higher AUD was clearly attributed to a weaker USD, yet as this issue is out of their hands they may not fancy their chances of turning the tide with a direct jawbone. Guy Debelle provided a minor retracement in a speech recently, only to AUD remain elevated. So, for today’s statement I’d have expected their wording to be more direct if they thought they could change this trend. Yet instead it merely outlines the headwinds a higher AUD brings to their output and forecasts, making today’s exchange rate commentary more of an attempt to manage expectations over a classic jawbone.
Summary of RBA’s August 2017 statement
- The Board decided to leave the cash rate unchanged at 1.50 per cent
- central forecast is for the economy to grow at an annual rate of around 3 per cent
- Slow growth in real wages and high levels of household debt are likely to constrain growth in spending
- Forward-looking indicators point to continued growth in employment
- Inflation is expected to pick up gradually
- The higher exchange rate is expected to contribute to subdued price pressures
- It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast
- Rent increases remain low in most cities
- Investors in residential property are facing higher interest rates
- The low level of interest rates is continuing to support the Australian economy
Earlier in the session, manufacturing PMI expanded for a 10th straight month in July and sots at a 3-month high of 56. The 1yr average trend continues to point higher although this month it has flattened off at 54.2. This is the 5th month above the 1yr average to show continued support for growth from the sector. New orders declined -3.7pts on the month and sits at a 6-month low of 558.8. The 1yr average is 57.2. which suggests potential headwinds ahead later in the year of orders do not pick up pace.
Trade data will be on focus tomorrow to see if exports can sustain the 9% annual rate seen last month. The trade balance has remained in surplus for 6 months which shows AUD is in demand by the rest of the world.
AUDNZD may have formed a swing low with a bullish hammer above 1.0593 support. As we have broken yesterday’s high and now also above the monthly pivot, we have greater confidence in the hammer’s low holding as support. As price action on AUDNZD cab be choppy and often provides overlapping candles, it is a pair which suits the use of limit orders for set-and-forget trades very well. We could consider using yesterday’s high to aid with trade entry (to enter long upon a retracement) or somewhere around the monthly pivot.
Assuming this is part of a 5-wave rally and we are now in the 5th wave, this also assumes it will break to a new high. We remain reserved on that outcome as, ideally, we would not have such a large overlap between the hammer low and the end of wave-2. So, for now we aim to exit before we get to the highs, unless momentum is strong in which case we can revise the target higher as price action unfolds.
