The immediate response to the Reserve Bank of Australia's latest monetary policy decision was muted, but I think the statement spoke volumes.
The RBA essentially declared a soft economic landing in China:
"China's growth has moderated to a more sustainable pace, but does not appear to be slowing further."
Up until this announcement, the RBA noted slowing growth in China as in the previous statement early last month: "…more recent indicators continue to suggest…a slower pace of growth in China." So, I believe the RBA's assessment is significant even if it is more relevant to the RBA's likely behavior in the near-future than actual economic conditions in China.
In my last commentary on Australian monetary policy, I surmised that "the RBA is looking beyond its borders and preparing for a world much less supportive of Australia's commodity-driven boom." This appears only partially true now. With China settling down, the RBA is now most concerned about the fallout from the sovereign debt crisis in Europe. Europe is "the most significant area of weakness" which "…will remain a potential source of adverse shocks for some time."
Once again, the RBA also seems little worried about the health of the domestic economy:
"…capital markets remain open to corporations and well-rated banks and Australian banks have had no difficulty accessing funding, including on an unsecured basis. Share markets have remained volatile, though in net terms they have generally risen over the past couple of months…In Australia, most indicators suggest growth close to trend overall. Labour market data show moderate employment growth, even with job shedding in some industries, and the rate of unemployment has thus far remained low."
Moreover, inflation should remain close to target in the near-term.
Finally, the RBA did not issue any stronger statements than usual about the strong Australian dollar (FXA). The observation that "the exchange rate…has remained high, despite the observed decline in the terms of trade and the weaker global outlook" has become boilerplate. It is certainly not enough to knock the Australian dollar off its currently bullish trajectory.
Overall, given the RBA's positioning in this statement, I believe the outlook for the Australian dollar continues to improve from here, even if marginally. At a minimum, there is no strong case for a sustained bearish position against the currency until a new catalyst arrives to disturb the current momentum.
Be careful out there!
Additional disclosure: In forex, I am short EUR/AUD, GBP/AUD, AUD/JPY, and AUD/USD