It was fun while it lasted. The anticipated relief rally in the Australian dollar (FXA) seems to have ended in parallel with the release of the meeting minutes from the last monetary policy meeting of the Reserve Bank of Australia (RBA). The charts below show the Australian dollar against four major currencies. In each case, the pair happened to bounce off/from key technical levels - 50-day moving average (DMA) resistance against the U.S. dollar and Japanese yen, 20DMA support against the British pound, and 50DMA support versus the euro. In other words, most primary trends remain well intact.
The euro could not hold its primary trend but the even more important 50DMA held up fine
The British pound maintains a strong upward trend against the Australian dollar
The Japanese yen is providing even stiffer resistance against relief rallies in the Australian dollar
For a quick minute, it looked like the Australian dollar might actually break free of resistance and rally further against the U.S. dollar
Source for charts: FreeStockCharts.com
Here are the nuggets I found of greatest interest from the minutes. I follow each one with my own editorial.
"…Bank's assessment that growth in China was unlikely to pick up much, if at all, in coming quarters."
The relatively benign outlook on China has ended. China will not help Australian growth prospects for quite some time.
"Members noted that the news received on domestic activity over the month was consistent with Australian economic growth being below trend in the June quarter."
With no help from China, weak domestic activity brings overall Australian economic growth below trend.
"The Board was briefed on revisions to the staff forecasts, which reflected the combination of the recent run of generally weaker data, a lowering in the expected profile for mining investment and the effects of the recent exchange rate depreciation. GDP growth was expected to remain below trend, at close to 2½ per cent through to mid 2014, before picking up thereafter."
I assume this means that the RBA is also anticipating that growth in China will finally pick up again in mid 2014.
"After having risen by around 90 basis points over the previous two months, US 10-year bond yields showed little net change in July. Members noted that, at 2½-2¾ per cent, those yields appeared more reflective of the outlook for the US economy than when they had been in the 1½-1¾ per cent range. In Europe, comparable yields were little changed, after initially following the increase in US yields, as both the European Central Bank and the Bank of England sought to distinguish their economies' weaker circumstances from those prevailing in the United States."
The RBA does not expect yields in the U.S. to come back to earth and acknowledges that the rate-fighting strategy chosen by the eurozone and the British is to deflect attention from good economic news.
"While the tightening in interbank liquidity conditions in China had eased significantly through July, there had been broader concerns among market participants about the slowing in Chinese growth and the structural challenges facing the Chinese authorities."
It seems concerns about China are growing, but the RBA is not raising loud alarm bells just yet.
"At recent meetings the Board had held the cash rate steady, but had judged that the inflation outlook might afford some scope to ease policy further, should that be necessary to support demand. The forecasts for this meeting suggested no lessening of that scope, but did show a weaker outlook for activity overall. The course of the exchange rate would be important. It had declined since the previous meeting, though remained high by historical standards. It was possible the exchange rate would decline further over time, which would assist in rebalancing growth in the economy, though it would also be affected by developments in other countries."
This statement is probably as close the RBA will come to saying that it will keep lowering interest rates until the exchange rate gets down to an agreeable level. While I simply cannot see how even lower rates can be justified from here, I suppose anything is possible when major trading partners continue to pursue zero interest rate policies. Regardless, this statement is also enough to get me to switch back to a bearish bias on the Australian dollar, thus ending my ride on the relief rally.
"Regarding the communication of this decision, members agreed that the Bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further."
This was a fascinating way of telling markets that the RBA will not directly communicate its plan for lowering interest rates. Most importantly, the RBA makes it clear that interest rate hikes are not even within the realm of minute possibilities.
So, overall, it is more of the same from the RBA: accommodative monetary policy as far as the eye can see!
Be careful out there!
Additional disclosure: In forex, I am net short the Australian dollar