Subtle Changes With Potentially Strong Implications For The Reserve Bank Of Australia's Latest Monetary Decision

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 |  Includes: CROC, FXA, GDAY
by: Dr. Duru

Summary

The Reserve Bank of Australia copies and pastes from one statement to the next again with some potentially important, albeit subtle, differences.

Decision implies worsening economic and financial conditions in China and emerging markets in general.

Decision implies worsening economic conditions in the natural resources sector.

As usual, the Australian dollar hangs in the balance. If weakness going into the decision continues, major follow-through to topping action may finally occur.

Once again, the latest monetary policy decision from the Reserve Bank of Australia (RBA) contained slight differences from the last statement. The RBA seems to enjoy copying and pasting from one statement to the next these days.

Here are the small differences that stick out the most to me with some thoughts and implications for the Australian dollar (NYSEARCA:FXA) following…

  1. The current statement points specifically to weakening property markets in China as "a challenge in the near term." Implication: confirms that the Chinese property market is a large risk factor and that the steel used for construction will likely sustain weakening demand. Iron ore prices are going past the current 5-year lows.
  2. Dropped the following important reference on global finance: "Emerging market economies are receiving capital inflows." Implication: The capital flowing into emerging markets is no longer bolstering the global outlook.
  3. "Resources sector investment spending is starting to decline significantly" essentially replaces "In Australia, growth was firmer around the turn of the year, but this resulted mainly from very strong increases in resource exports as new capacity came on line; smaller increases in such exports are likely in coming quarters." Implication: the tipping point may have finally arrived where Australia needs domestic investment and demand to pick up the slack from the resources sector. This will not likely happen until the Australian dollar weakens again.
  4. Dropped the following reference to inflation: "Recent data showed an increase in inflation, with both headline and underlying measures affected by the decline in the exchange rate last year." Implication: whatever pressure remained to prevent future rate cuts has now left the building…
  5. Instead of "savers", "investors continue to look for higher returns in response to low rates on safe instruments." Implication: unknown. I scratched my head on this change, but I am noting it in case the implication for this change becomes clearer in time.
  6. The RBA inserted the part in bold: "The exchange rate, on the other hand,remains above most estimates of its fundamental value, particularly given the declines in key commodity prices." Implication: this change is mainly interesting because of the commentary on the Australian dollar from Governor Glenn Stevens before Australia's House of Representatives last month. I still have outstanding a more complete review. Stevens made stronger references to fundamentals working against the Australian dollar and the likely losses awaiting those fighting the fundamentals.

The RBA is clearly trying its best to remind financial markets that its currency is over-valued. Unfortunately, there is nothing dramatic left in the arsenal. Interestingly, the Australian dollar weakened sharply on an intraday basis going into the statement, but it remains surprisingly resilient, especially with iron ore now dropping to 5-year lows.

Forex markets take down the Australian dollar ahead of the RBA monetary decision

Over the next day or two, I will be looking to see whether the Australian dollar manages to recover these losses. If now, it MAY be a sign that the following topping pattern on a daily basis is finally ready for some follow-through…with the 200-day moving average below remaining as a potential source of strong (near-term) support.

A topping pattern in slow motion

Source: FreeStockCharts.com

Iron ore continues to pile up in Chinese inventories. Per Bloomberg:

Inventories at Chinese ports rose to 109.7 million tons as of Aug. 22, according to Shanghai Steelhome Information Technology Co. That's 27 percent higher this year and near the record of 113.7 million tons set in July.

Given this on-going pile-up, I am strongly suspecting a period of de-stocking is somewhere on the near horizon which will really yank the rug from underneath iron prices. That point could be a major testing point for the Australian dollar. I purposely say "could" because it is always possible that the market continues looking beyond the brightening red flag waving over Australia's resources sector (and economy) to the time when the Australian economy somehow manages to regain its luster despite its over-valued currency…

Be careful out there!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In forex, I am net short the Australian dollar.