It’s hard to say that AUD bulls were disappointed by the RBA’s first decision to keep rates unchanged this month, as there was next to no expectation of an increase on the cards.
In fact, AUD was seen a little stronger in response to the meeting since bulls were relieved by the lack of dovish commentary. Some players were expecting to hear the RBA talking about the potential need for further monetary support given the ongoing issues within the economy.
The statement from the RBA told a familiar story, with the central bank lamenting the continued decline in domestic house prices, headlined by their sharpest drop in 35 years over the final month of 2018, saying:
“The housing markets in Sydney and Melbourne are going through a period of adjustment, after an earlier large run-up in prices. Conditions have weakened further in both markets and rent inflation remains low. Credit conditions for some borrowers are tighter than they have been.”
Downside Risks Have Increased
However, the RBA governor Phillip Lowe did note that “downside risks have increased,” which is the perspective currently shared by the majority of G10 central banks. In this context, Lowe forecasts domestic GDP to rise “around 3% this year and by a little less in 2020 due to slower growth in exports of resources.”
Data just ahead of the meeting was mixed, with weaker December retail sales pushing AUD down before a better than expected trade balance figure helping prop price up again.
Nevertheless, the contribution from net exports is likely not the main driver given the 8% of oil imports seen in response to much lower prices recently.
Most Players Now Forecasting A Rate Cut Next
Conditions around the housing market have fuelled a surge in rate cut expectation among market players. With some regional banks increasing their mortgage rates out of cycle last year, the average owner-occupier mortgage has now jumped 14% since September 2018.
Such conditions could force the RBA to cut rates again. This would be in order to buffer against higher funding costs for households which remain heavily indebted and suffering from low incomes.
Indeed, the current conditions certainly prohibit an RBA rate rise, which is reflected in the dramatic shift we have seen in market pricing.
The last adjustment by the RBA was when it cut rates in August 2016 to sit at the current, record lows of 1.5%. Over the past two years, market sentiment has shifted dramatically with the number of players forecasting a hike having fallen to around 40% from 80%.
Despite the heavy fundamental conditions, AUDUSD is still threatening a bullish reversal here. After breaking down below the .7021 support level at the start of the year, price reversed sharply higher and has since traded back up to test the bearish trend line from 2018 highs, moving above the local high of .7237.
If price can stay above here, bulls will be looking for a break of the .7393 level to engage in further topside momentum. However, there is plenty of structural resistance overhead, given that price is sitting in the low end of the three-year range we have seen. Therefore, any upward move is likely to be choppy and labored.