The timing of The Reserve Bank of Australia's interest rate cuts is starting to look like a random number generator. In its latest statement on monetary policy (Nov 6th in Australia), the RBA decided to leave interest rates at 3.25% while essentially repeating the same assessments it has had for the last several meetings. The main difference was in the RBA's assessment of inflation which printed hotter than expected last month (emphasis mine):
At today's meeting, with prices data slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being.
Although the RBA acknowledged the latest reading on inflation was higher than expected, the numbers "…still show inflation consistent with the medium-term target, with underlying measures around 2½ per cent over the year to September, and headline CPI inflation a little lower than that." The RBA expects a softening job market to contain inflationary pressures. These reassurances signal that the RBA certainly has no intention of rolling back its accomodative stand even as "further effects of actions already taken to ease monetary policy can be expected over time."
The RBA balked at the inflation numbers and veered off the more accomodative course it seemed to set ahead of itself. The market's disappointment was instant of course. Consensus expectations were set for another rate cut this month although the RBA has established no set timetable for continuing to ease monetary conditions according to its accomodative bias. I expect this surge to be temporary, and it sets up a good opportunity for fresh shorts and/or adding to short positions against the Australian dollar (FXA).
The Australian dollar is grinding its way higher after first selling off in the wake the Federal Reserve's QE3 in mid-September
The RBA noted that its accommodative policies seem to be having an impact, but the RBA refrained from quantifying its satisfaction with what can be observed right now…
Over the past year, monetary policy has become more accommodative. Interest rates for borrowers have declined to be clearly below their medium-term averages and savers are facing increased incentives to look for assets with higher returns. While the impact of these changes takes some time to work through the economy, there are signs of easier conditions starting to have some of the expected effects. Business demand for external funding has increased this year, the housing market has strengthened and share prices have risen in line with markets overseas. The exchange rate, though, remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook.
The regularly scheduled reminder that the RBA believes the Australian dollar is higher than desired should serve as a reminder that the RBA is biased for action to do what it can to drive the currency lower. That bias continues to underline my bearish leanings against the Australian dollar.
Be careful out there!
Additional disclosure: In forex, I am net short the Australian dollar.