The Australian dollar was quite active in the week ending 11 July, as the Reserve Bank of Australia (‘the RBA’) met on Tuesday, 8 July, and went against expectations by leaving rates unchanged. This article looks at the context of the RBA’s decision and then briefly analyses the charts of AUDUSD and AUDJPY.
Despite the wide consensus that the RBA would cut its cash rate to 3.6% on 8 July, the bank kept it at 3.85% with six votes in favour and three dissenting. The RBC pointed to a lack of evidence that inflation has returned to target sustainably:
Australian annual headline inflation in the first quarter stayed at 2.4% while expectations had suggested a slight decline to 2.3%. As in various other countries around the world, a significant part of the upward pressure on inflation came from electricity. While there has been significant progress in reducing inflation and 2.4% is the lowest since the first quarter of 2021, it’s still fairly far from being 2% consistently, so the RBA’s caution seems justified and in line with recent comments from most other major central banks.
The RBA also cited a strong job market as a reason not to cut rates at its last meeting:
While there doesn’t seem to be any directional trend for the rate of unemployment, having been static since the beginning of the year at 4.1%, this is a historically low figure. Pre-Covid, unemployment in Australia was holding at or above 5%. The current figure is less than 1% higher than the record low of 3.4% from October 2022. The RBA is likely to be looking for a sustained rise in the rate of unemployment or other clear signs of a weakening job market to have more confidence to cut rates further.
Australia’s economy and currency are generally trade sensitive because the country’s exports feature a large chunk of raw materials, so disruptions to trade can cause headwinds for the Aussie dollar. That hasn’t happened very consistently in the latest round of news about tariffs. Even though there’s only one confirmed trade deal, markets are generally discounting the most negative scenarios. Donald Trump’s notoriously poor policy discipline now has a new name, ‘TACO’, short for ‘Trump always chickens out’. However, if Mr Trump, for some reason, doesn’t chicken out early next month, there might be a significant hit to the Aussie dollar.
8 July’s surprising hold by the RBA helped the Aussie dollar to recover lost ground against its American counterpart and push up to a new high. Sentiment seems to be mostly discounting the American governments announcements about upcoming tariffs while underlying data from Australia are somewhat positive or at least certainly not as negative as had been expected around the beginning of the year.
finance.yahoo.com
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