The Reserve Bank of Australia released their latest policy statement amid a deluge of tepid economic data. The bank says, despite the data, that Australia is to grow at a solid pace over the next few years. Although they see growth averaging 3% in the medium to long term they decided to keep rates unchanged at this time. Their reasoning; low rates have helped the economy recover along with the rest of the world but has not yet reached sustainable levels. Low rates are consistent with the growth forecast, a change would be detrimental.
The labor market has been “quite positive of late” says the statement but wages and inflation remain low. This is due in part to spare capacity that is expected to remain within the system as well as lingering effects in the post-mining boom environment. The effects of the boom are viewed as dissipating and should be gone within the next year or so. Inflation has approached the 2% target in the last quarter or so but is still running tame and not expected to increase substantially in the near term. The bank projected a rise to 2.25% by the end of the forecast period which equates to 1-2 years.
The Australian trade balance unexpectedly swung to deficit as imports surge. Imports grew at a hot rate of 6% compared to export growth of only 2%. While the news does reveal an imbalance of trade it also reveals growing consumption and a better than expected increase in exports, sign of improving domestic activity and global demand. On the retail front sales fell more than expected in December but were strong in the 4th quarter. December sales fell -0.5% while total sales in the 4th quarter grew by 0.9%.
The news helped the Aussie dollar gain some strength in today’s trading, but moves were mixed across the currency spectrum. The euro tried to move higher on the news but weaker than expected in the EU capped gains at a key resistance level. In the EU retail PMI fell to 50.8 from the previous month’s 53.0 giving sign that woe in the sector is not limited to the US.
The EUR/AUD created a small, possibly shooting star, doji in the early Tuesday session and is indicating resistance. Today’s action touched a 2+ year high but resistance is closer to 1.5750 than 1.5800. A break above this would be bullish and may come in the near term. The pair has made a strong move up off the short term moving average and poised to go higher. The indicators are both bullish and set for trend following entry with a firm break to new highs.
The Aussie dollar gained versus the British pound although the pair remains range bound near a short-term top. The pair had been climbing in the earliest portion of the session but fell back by late morning as outlook for the BOE at Friday’s meeting does not truly support strengthening of the pound.
The British economy is expanding but faces unique hurdles (Brexit) that are hindering growth. The bank is not expected to raise rates and if the committee sounds dovish in the least could send the pound lower. The pair is now moving down towards the moving average, a break below which may lead to further downside.
The AUD/JPY fell hard in the early hours in an extension of the previous day’s decline. The move was met by buyers at a key support level near 85. The pair made a sharp reversal, regained all the lost ground and more, creating a long tailed bullish candle. This candle confirms support in the 85-86 region and will likely lead to sideways trading if not a move up.
The indicators are rolling into a bullish signal but MACD has not yet confirmed. The first target for resistance is near 87.
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