RBA stands pat on rates, higher AUD exchange rates could drag it closer to easing

At its policy meeting today the Reserve Bank of Australia as widely expected left the official interest rate unchanged at 2%. AUD-USD appreciated in an initial reaction as some market participants had nonetheless hoped for a small surprise. AUD/USD saw a 40-pips knee-jerk spike on RBA’s status-quo, hitting session highs at 0.7630, but quickly faded the spike.

Most notable was the central bank's language regarding AUD exchange rate which has become more explicit. At the March meeting the central bank stated that “the exchange rate has been adjusting to the evolving economic outlook”. Today, however, it sent out clearer signals saying "An appreciating exchange rate could complicate the adjustment under way in the economy”. RBA refrained from categorically jawboning the AUD lower and there is nothing in today’s statement to suggest a May cut is imminent. The RBA dropped reference to market turbulence. 

In a statement following the meeting, RBA governor Glenn Stevens said the Australian dollar has "appreciated somewhat recently, in part reflecting some increase in commodity prices, but monetary developments elsewhere in the world have also played a role". Since the RBA’s last meeting on March 1, data showed economic growth accelerated to 3 percent in Q4 2015, the unemployment rate fell back to 5.8 percent after spiking to 6 percent in January and business conditions jumped. On the flipside, retail sales have stagnated, consumer confidence eased and house-price growth decelerated. The Aussie has gained about 12% from the lows seen in January this year when it was heading for US68 cents. 

At today's meeting, the Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target, thus justifying its decision that the current setting of monetary policy remained appropriate. Data flows should allow the Board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing.  The RBA reaffirmed preparedness to lower rates if needed to support demand.

“It is now quite clear that the RBA is close to acting on its easing bias,” said James McIntyre, head of economic research at Macquarie Group Ltd. in Sydney. “The higher Australian dollar has dragged the RBA closer to cutting rates. However, the RBA’s statement makes it clear that a cut will ultimately be driven by the labor market and inflation outcomes.”

AUD/USD faded RBA induced spike, sliped below 0.76 handle and was trading at 0.7537 at 1140 GMT.