THE A$ surged more than US1c higher overnight, following yesterday’s Reserve Bank of Australia decision to leave interest rates unchanged, and negative economic news and stock market trends overseas.
The currency value went as high as US89.42c overnight before settling a little this morning. It currently sits at around US89.27c – almost US2c higher than where it was a week ago.
Stock markets in Australia and overseas yesterday suffered a big check on the back of further negative economic news out of the US, which was one factor driving the exchange rate trend.
Second was the RBA’s monthly meeting yesterday, which left the official cash interest rate unchanged at 2.5pc, in line with analysts’ predictions. The rate was last adjusted downwards by 0.25pc in August last year.
However, in its first policy assessment for the New Year, the RBA Board has made substantial changes to its outlook, and is now are signalling that it does not expect to cut rates again in this cycle.
National Australia Bank’s chief markets economist Robert Henderson, said NAB’s view was that RBA’s monetary policy would now remain unchanged for most of 2014, before a possible cut around November.
“Most important in yesterday’s RBA statement was the change of wording of a paragraph which now states that, ‘On present indications, the most prudent course is likely to be a period of stability in interest rates’,” Mr Henderson said.
The previous few RBA post-meeting statements had simply said ‘The Board will continue to assess the outlook and adjust policy as needed.’
“In another important development, the RBA’s attitude to the currency has undergone a sea-change,” Mr Henderson said.
“For the past couple of months the A$ has been characterised by the RBA as ‘uncomfortably high’. This was a clear attempt to jaw-bone the currency lower, after a miss-step in October where the word ‘high’ was removed as a descriptor of the exchange rate,” he said.
“Now, ‘high’ is gone again. Instead, the RBA says the currency, if it stays where it is, will assist in achieving balanced growth in the economy. This must mean the RBA is comfortable enough with the currency around recent levels – more than US3c lower than where it sat at the RBA’s December meeting.”
Behind all of this appears to be a group ‘gulp’ at the RBA about the inflation outlook, NAB’s commentary released this morning suggested.
Inflation on the rise
The drop in the currency over the second half of 2013 showed up in a spike in tradeables inflation (import prices) in the September and December quarters of 2013, averaging just under 1pc a quarter, or about 4pc for the year.
“Clearly the recent currency fall is working its way through into higher consumer inflation,” Mr Henderson said.
Meanwhile, non-tradeables inflation also continues to average about 1pc per quarter.
“As the RBA says, the outcome in the December quarter was higher than expected, in part because of faster than expected pass-through of the lower exchange rate. We now expect the RBA to raise its underlying inflation forecast in Friday’s SMP to at least 2.75pc for the June quarter of 2014 and to keep it about that level for December.
The corollary to this was that there was just not much ‘headroom’ for the RBA to cut rates any further, Mr Henderson said. Nor is there much room for the currency to fall further, which could extenuate the rise in tradeables inflation.
“Policy makers are hoping rising unemployment will continue the downward pressure on non-tradeables prices. If domestic costs (wages) remain contained, some moderation in the growth of prices for non-traded goods could be expected over time.”
“Our view remains that the outsized fall in mining investment will cause widespread weakness in the domestic economy and rising unemployment,” Mr Henderson said.
“In turn, this will see inflation slow and dampen house prices, leading the RBA to cut again towards the end of the year.”
“On the international front, the RBA seems pretty comfortable about the global outlook, noting the US continues its expansion, Europe has begun a ‘fragile’ recovery, Japan has recorded a ‘significant pick-up in growth’, while China’s growth remains in line with policy makers’ objectives,” Mr Henderson said.
This assessment seemed to override the observation that financial conditions in some emerging market countries are more ‘challenging’.
NAB’s recent Business Survey seemed to have played a part in the RBA’s more upbeat assessment of local prospects, with the Governor’s Statement mentioning that some ‘indicators of business conditions and confidence’ have improved.
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