Australian Dollar Soars After RBA Minutes

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The release of the Reserve Bank of Australia’s meeting minutes turned out to be extremely positive for the country’s currency. While the RBA left interest rates unchanged when they met in August, their concern about the high level of the exchange rate, peak in terms of trade and weaker global economic conditions had many traders worried that the central bank could consider lowering rates again. However the RBA minutes was not nearly as pessimistic as the monetary policy statement released on August 7th and the central bank made no mention of possible currency intervention which helped to send the AUD/USD sharply higher.

The RBA’s optimism about the local economy helped offset their concerns about global growth. Monetary policy committee members said consumer spending retained momentum in the June quarter. Previous rate cuts and higher rents brought stability to the housing market while the resource sector is benefitting from large projects receiving approval or just commencing. There were also signs that investment growth has steadied and “employment growth continued to reflect the net effect of strong growth in the resource sector.” In early August, there were some disappointments in Chinese economic data but the RBA appeared to be unfazed, choosing instead to characterize the Chinese economy as “stabilizing.”

The RBA is overlooking many of the problems that investors have been worried about which suggests that they do not believe Europe and China will pose a major threat to their local economy in the last 4 months of the year. For the time being, the central bank has become more tolerant of a higher exchange rate and is comfortably on hold. The RBA even admitted that part of the gains in AUD/USD can be attributed to reserve diversification by the Swiss National Bank. They said the SNB purchased EUR 100 billion worth of AUD over May and June with further large purchases occurring in July.

Barring any surprise shock to the European economy, we expect the RBA to keep interest rates on hold for the rest of the year. The AUD/USD rose from 1.0450 to 1.480 after the RBA minutes – when Europe opens, the 1.05 level could be tested and broken.

Kathy Lien
Managing Director

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