Flash Notes:RBA Still Looks For A Lower AUD

As expected, the RBA left its policy rate unchanged at 2.50% and stated that “monetary policy is appropriately configuredto foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the mostprudent course is likely to be a period of stability in interest rates”.

    Given that the Australia dollar has depreciated by about 6% against the USD since the last board meeting, we were lookingfor the central bank to modify its message on the currency. However, the RBA stated that whilst “the exchange rate hasdeclined recently, in large part reflecting the strengthening US dollar”, it “remains high by historical standards, particularlygiven the further declines in key commodity prices in recent months. It is offering less assistance than would normallybe expected in achieving balanced growth in the economy”. This shows that whilst recent moves in the AUD have beenacknowledged, it seems obvious that the RBA would still prefer a lower currency.

    We will also continue to monitor the labour market and looking ahead further into the week, employment data is due onThursday. Recall that Australia saw an extraordinary 121k rise in employment for August, and a decline in the unemploymentrate to 6.1%. However, given the persisting volatility in the labour market, and at a juncture where the Australian economyis still in the rebalancing act, a meaningful recovery of the labour market is needed before the RBA consider lifting rates.

    Besides, as we have previously highlighted, the very low interest rates have been supporting the booming housing market,and this is the reason why the RBA has little incentive to cut its cash rate further. In fact, concerns have come to the forerecently about the housing market, although RBA Governor Glenn Stevens had little to say today about housing prices.

    The central bank’s low cash rate has helped revived the housing market by fuelling a decline in the average mortgage rateto 5.1% in 2Q from 5.35% a year earlier. New home sales totaled 7,283 in August, 16% higher than in July 2013. Nationwidehousing loans have also increased 8.8% since 2Q13, outpacing a 7.6% rise in total loans.

    Currently just shy of the 0.8800-figure, AUD/USD whipsawed higher following the RBA’s decision. Still, the pair remainsheavy overall. Renewed selling last Friday resulted in a fresh year-to-date low of 0.8642. The current technical readings arestill clearly oversold and we believe a sustained down-move is unlikely at this stage. We are adopting a neutral view nowand expect this pair to trade between 0.8630 and 0.8830 for the next couple of weeks.