RBA Minutes Upbeat, But Australian Dollar Weakens on Risk Aversion

Market overviews

Australian Dollar is under broad based selling pressure today. RBA minutes reiterated the non-urgency for any rate move. IMF report pointed out risks are tilted to the downside in Australia. But risk aversion is more likely the factor driving Aussie down. Major Asian indices are in deep red following the weakness in the US overnight, as tech selloff intensified. Euro and Dollar are following as the next weakest so far. Swiss Franc is the strongest one for today, extending yesterday’s surprised rally. Meanwhile, New Zealand Dollar also bucks the trend as it’s digesting yesterday’s loss.

Technically, strong resistance at 0.7314 as experienced by AUD/USD is also a factor weighing down the Aussie. For now, there is no confirmation of rejection by 0.7314 yet. But break of 0.7164 support (which is still far) will indicate near term reversal. EUR/AUD’s break of 1.5693 minor resistance yesterday suggests short term topping and we’ll likely see some stronger rebound ahead. USD/CHF’s break of 0.9952 support is seen as an indication of bearish reversal. But for now, EUR/USD is holding below 1.1499 resistance. So there is no confirmation of broad based weakness in Dollar yet.

In other markets, NASDAQ led the way down yesterday by dropping -3.03%. DOW closed down -1.56% and S&P 500 lost -1.66%. Treasury yields closed generally lower with 10 year yield down -0.017 at 3.057. 30 year yield showed some resilience and was down -0.011 only to 3.316. In Asia, all major indices are in red. Nikkei is down -1.12%, Hong Kong HSI down -1.89%, China Shanghai SSE down -1.51% and Singapore Strait Times down -1.18%.

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RBA cautiously upbeat, but nowhere near a rate hike

RBA sounded cautiously upbeat in the minutes of November 6 meeting. There it noted that “Australian economy had continued to improve and had been a little stronger than expected”. However, “outlook for consumption continued to be a source of uncertainty in an environment of slow growth in household incomes”. Conditions in the labor market had also be “stronger than expected”, and “forward-looking indicators of labour demand continued to point to ongoing strength in the near term”.

Nevertheless, underlying inflation remained “low and stable”, consistent with previous forecasts. Housing market conditions in Sydney and Melbourne “had continued to ease”. “Housing credit growth had declined, particularly for investors, but had continued to be higher than growth in household income”.

Overall, RBA maintained that “the next move in the cash rate was more likely to be an increase than a decrease, but that there was no strong case for a near-term adjustment in monetary policy.”

There are also two interesting points to note. Firstly, RBA noted the depreciation in Australian Dollar exchange rate in 2018. And to the board member “this had reflected offsetting effects on the exchange rate from higher commodity prices, on the one hand, and the decline in Australian bond yields relative to those in other major markets, on the other hand.”

Regarding future monetary policy moves, board members discussed how different scenarios could affect the decision. And, “the appropriate policy response would depend on the specifics of the situation, including the underlying factors driving economic developments.” RBA also quoted an example in the minutes. “For example, in the event of a marked change in the strength of the global economy, the effect on the Australian economy – and thus the appropriate monetary policy response – would depend on any associated move in the exchange rate of the Australian dollar.”

IMF: Australia’s growth to continue but risks tiled to the downside

IMF noted in a report that Australia’s recent strong growth is expected to “continue in the near term”. Also, “further reducing slack in the economy and leading the way to gradual upward pressure on wages and prices.” In particular, “private consumption growth is anticipated to remain buoyant, supported by strong employment gains.” Also, “rebound in non-mining private business investment and further growth in public investment is envisaged to offset a softening in dwelling investment.”

However, balance of risks is “tilted to the downside” with a “less favorable global risk picture”. IMF noted “weaker-than-expected near-term outlook in China coupled with further rising global protectionism and trade tensions could delay full closure of the output gap”. Also, “sharp tightening of global financial conditions could spill over into domestic financial markets, raising funding costs and lowering disposable income of debtors, with the impact also depending on the response of the Australian dollar”.

Also, “domestic demand may equally turn out weaker if wage growth remained subdued or investment spillovers were smaller.” Housing market downturn is “another source of risk”. But under the baseline outlook, the housing correction “remains orderly”. But negative risk developments could “amplify the correction and lower domestic demand.”

BoJ Kuroda: Negative rate still necessary but no need to take extra easing

BoJ Governor Haruhiko Kuroda ruled out the need to ramp up stimulus today. He said that “there’s no need to take additional steps. What’s important is to ensure our policy is sustainable, with an eye on balancing its pros and cons.”

But at the same time, he also ruled out an early end to the negative interest rate policy. He noted “I know there is various debate on the BoJ’s negative rate policy”, “but for the time being, it’s a necessary step that is part of our large-scale monetary easing program.”

Kuroda remained optimistic that “wage and price growth will likely accelerate” and lift inflation to 2% target eventually. But that change of doing that any time during fiscal 2020 is “slim”.

Fed Williams: Interest rates are still very low, and we’ll likely raise them somewhat

New York Fed President John Williams said overnight that the US is “in a great position”, where “unemployment is very low, the economy has got a lot of, I think good, positive signs and for us it’s just keeping a good balance. Keeping this economy strong and stable.”

For now, Williams noted “interest rates are still very low”. And, “We’ll be likely raising interest rates somewhat but it’s really in the context of a very strong economy”. Though, he also noted that Fed is “not on a preset course”, but “we’ll adjust how we do monetary policy to do our best to keep this economy going strong with low inflation.”

For December meeting, Williams said, “what we’re going to do over the next FOMC monetary policy meeting, we’re going to do what we’ve been doing as best we can – we’re going to find a … gradual path of the monetary policy back to a more normal level of interest rates.”

Looking ahead

BoE Governor Mark Carney’s inflation report hearing will be a main focus for today. On the data front, Swiss will release trade balance. Germany will release PPI. UK will release CBI trends total orders. US will release housing starts and building permits later in the day.

EUR/AUD Daily Outlook

Daily Pivots: (S1) 1.5613; (P) 1.5668; (R1) 1.5759; More….

The break of 1.5693 minor resistance suggests that a short term bottom is formed at 1.5519 in AUD/USD, in bullish convergence condition in 4 hour MACD. Intraday bias is turned back to the upside for rebound to 38.2% retracement of 1.6357 to 1.5519 at 1.5839 and possibly above. But upside should be limited well below 1.5984 support turned resistance to bring fall resumption. On the downside, below 1.5643 minor support will bring retest of 1.5519 low.

In the bigger picture, current development argues that up trend from 1.3624 (2017 low) is possibly completed at 1.6357, ahead of 1.6587 (2015 high). This is supported by bearish divergence condition in weekly MACD. Deeper decline is now in favor to 1.5271 cluster support (38.2% retracement of 1.3624 to 1.6357 at 1.5313). Break will target 61.8% retracement at 1.4668. On the upside, break of 1.5984 support turned resistance is now needed to revive the prior medium term up trend. Otherwise, further decline will be in favor even in case of strong interim rebound.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
00:30 AUD RBA Minutes
07:00 CHF Trade Balance (CHF) Oct 2.89B 2.43B
07:00 EUR German PPI M/M Oct 0.30% 0.50%
07:00 EUR German PPI Y/Y Oct 3.30% 3.20%
11:00 GBP CBI Trends Total Orders Nov -5 -6
13:30 USD Housing Starts Oct 1.23M 1.20M
13:30 USD Building Permits Oct 1.26M 1.24M