A Mysterious Omission By The Reserve Bank Of Australia Lifts The Australian Dollar

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Includes: CROC, FXA, FXB
by: Duru

Summary

The Australian dollar receives a boost from the latest decision on monetary policy from the Reserve Bank of Australia.

The decision was very similar to July's statement except that the RBA was mysteriously vague about its desired direction for the Australian dollar.

Given shrinking inventories of iron ore and iron ore prices driven more by the jostling of traders than fundamentals, there is an implication that a bottoming process may be underway.

Retail sales and trade balance data earlier helped prime the market to lift the Australian dollar.

The morning of August 4, 2015 (Australia time) was chock full of data and decisions important to the Australian dollar. I start from the end and work backward.

The Reserve Bank of Australia (RBA) issued its monetary policy decision for August. The RBA left rates unchanged just as the market expected. The rest of the statement was boilerplate and nothing new…except the reference to the Australian dollar (NYSE:FXA). The RBA dropped the typical "…further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices" and instead simply noted "the Australian dollar is adjusting to the significant declines in key commodity prices."

This change in content is mysterious: it says nothing about whether the RBA still thinks the currency will and SHOULD still decline at a time when it seems the RBA needs the market to do the RBA's heavy-lifting more than ever. The statement even implies that "further depreciation" is no longer likely and necessary; perhaps the on-going collapse in commodities is due for a much needed rest and bottoming. Such an implication is particularly poignant given China's inventory of iron ore has now reportedly fallen to a 19-month low and much of the recent wild swings in price seem driven by frenetic futures trading (see for example "Iron Ore Trade in China Climbs to Record as Volatility Rises" in Bloomberg).

The Australian dollar immediately spiked higher against the U.S. dollar and other major currencies on the heels of the RBA's decision.

A series of data apparently favorable to the Australian dollar

As the chart above shows, two important economic releases provided additional light on the Australian economy just ahead of the RBA decision. Retail sales suggest that the Australian consumer is still managing to hang in there. The Australian Bureau of Statistics (ABS) reported a seasonally adjusted 0.7% gain in retail sales (turnover) from May to June, 2015. Leading the way were household goods (a whopping 2.2% gain) and "other retailing" (a 2.0% gain). The leading categories in "other" were pharmaceuticals and cosmetic and toiletry goods. Food, department stores, and clothing, footwear, and personal accessories all fell from May to June.

Cannot find brewing economic trouble in Australia's aggregate retail data

Source: The Australian Bureau of Statistics (ABS)

The ABS reported data on Australia's trade balance that showed a decline from May to June but nowhere near April's disastrous print. Exports even climbed, but imports increased even more. I am surprised that the decline in the Australian dollar is not impacting imports more. Regardless, at least the trade balance did not surprise with even worse news.

For trading the Australian dollar, the only adjustment I am making is accumulating a fresh long position on the British pound (NYSE:FXB) versus the Australian dollar (GBP/AUD). This trend-following trade is more precarious than usual given this week's "mega release" of economic data for the United Kingdom on Thursday, August 6th.

GBP/AUD dips below its rapidly ascending 20-day moving average (DMA) for the first time in 2 months

Source for currency charts: FreeStockCharts.com

Be careful out there!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In forex, I am long and short various currencies against the Australian dollar