At its latest interest rate meeting on October 4th, the Reserve Bank of Australia (NYSE:RBA) kept its base policy rate unchanged at the record low of 1.5 percent. In its statement, the RBA reiterated that the country's moderate economic activity has been the result of many factors. Perhaps most notable is the slowing of investments in mining, although this has been offset to some extent by residential housing demand (albeit at slower pace). The bank also informed markets that subdued growth in labor costs are hampering inflation, which has now dropped to 1 percent - almost 50 percent of the target inflation rate.
In its public release, the bank explained that global economic activity is growing at a slower pace, and that the job market is strengthening in the advanced economies. But the industrial production and global trade performance has remained subdued. Though the efforts from the Chinese central bank is supporting the growth, economic activity in China is growing at a moderate pace. This is critical for Australia as a raw materials exporter, and the recent rise in commodities prices is helping trade in Australia. This is likely to be reflected in investor sentiment with respect to metals and commodities assets, and these trends could be enough to propel the AUD/USD to new highs for the year.
Chart Outlook: AUD/USD 1-Year Performance
Chart Source: Modern Forex Trading
The accommodative stance at the central bank is supporting domestic demand, and the lower exchange rate is helping the export sector. Considering all of this information, however, the bank continued with its dovish stance and maintained the rates. So the real question here is whether (or for how long) this can actually continue.
Chart Outlook: Australian PMI
Chart Source: New Forex Trends
The impact of the policy measures of August is visible in the Manufacturing PMI, which has risen to 49.8 in the month of September from the previous month's figure of 46.9 on the back of strong performance of food and beverages sub-sector.
This is still below the expansionary level but the country is now becoming very close to reversing those trends. Additionally, the consumer confidence survey has moved to 102.4, indicating a rise of 1.1 percent compared to previous month, and this shows that the consumer sentiment is improving on the higher probabilities of strong growth in the next twelve months. These trends help to solidify the performance in Australia for both domestic and export markets, and this will be the main catalyst for inflation into next year.
The Reserve Bank of Australia will continue to watch the global data as the world economy is still trying to get out of the woods, and on the path to more sustainable GDP growth rates. Weaker Chinese growth, along with the increasing concerns over the European Union's bank stress test results could keep rates in check for the near-term but, overall, the path is still upward. Although it can still be said that domestic sentiment in Australia is improving, inflation is steady and the job market strength is uneven in various parts of the country. These areas could be the final dominoes to fall, however, and forex traders should be positioning themselves on the long side in AUD/USD at current levels (near 0.75) in anticipation of the next mores higher.
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