Early on Tuesday, the Australian dollar picked up following the upbeat Chinese PMI data, but a few hours later the RBA’s decision to maintain its monetary policy on hold over concerns of a rising exchange rate drove the currency lower.
As expected, RBA policymakers held interest rates steady on Tuesday at a record low of 1.5% at their August meeting, with rates being unchanged for almost a year now. Despite the bank’s forecasts about Australian economic growth remaining optimistic, as employment opportunities, consumer confidence, and business conditions are continuously improving, RBA members are worried about the inflation outlook. With employees enjoying only less than half the wage growth from a decade ago and wages rising at a multi-year low rate of 1.9%, employees’ disposable income is restricted by heavy debt obligations, and this is creating downwards pressure on prices. Moreover, the RBA governor Philip Lowe expressed his concerns in the statement about the appreciation of the aussie, which also contributes to the weak course of inflation by lowering import prices, saying that ‘an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.’.
Before the RBA’s announcement though, Chinese Caixin manufacturing purchasing managers index, which gives a general view of activity in the manufacturing sector, surprised analysts to the upside who had anticipated the index to stick to its previous reading. The Caixin manufacturing PMI climbed to 51.1 in July compared to 50.4 in June, posting the highest mark since April.
Turning to the forex markets, the aussie peaked above $0.80, climbing by 0.50% to $0.8042 in early Asian trading, finding support particularly due to the dollar’s weakness and the Chinese data. However, the aussie followed a downtrend after the RBA statement, reversing part of its overnight gains and falling to $0.8010.
