Traders took the AUD half a cent higher to 0.9073 on the release of the RBA’s minutes from its February board meeting, but the bank is still oozing caution about the rate of growth in the Australian economy.
They acknowledge monetary policy is working in housing and other interest rate sectors, but the RBA is also very concerned about the labour market.
On employment, they specifically note there has been little growth “over the past year or so” and average hours worked have also declined in recent months.
Interestingly, in their discussion about inflation and its possible causes (one of which is the depreciation of the Aussie dollar), they say: “the increase in non-tradables inflation was somewhat at odds with the soft growth in labour costs associated with the weak labour market.”
“Weak labour market” is not gilding the lily in any sense of the word. And while RBA staffers have upgraded the forecast from the November Statement on Monetary Policy, this is “in part due to the lower exchange rate, which is expected to boost activity in the traded sector”.
But there can be no doubt the RBA — at the time of the February meeting — had a more positive outlook on the Australian economy than it had in some months.
The key here is that monetary policy is gaining traction, with the RBA noting: “the expansionary setting of monetary policy was having the expected effects, with more timely indicators having been more positive for consumption, dwelling investment, business conditions and exports.”
So the big question for traders now is: what impact an Aussie dollar that is three and half cents higher than it was at the time of the February meeting, and back where it was at the December meeting, will have on the outlook for growth which it was noted in the minutes was “likely to be at a below-trend pace”.
Once again the RBA’s words give us a lead on what they are thinking. As they say in their concluding “Considerations for Monetary Policy”:
The exchange rate had also depreciated further since the December meeting. If sustained, a lower exchange rate would be expansionary for economic activity and assist in achieving balanced growth of the economy.
It’s a difficult time for the market, as well as the RBA, to gauge the strength and sustainability of the recovery.
While it is clear rates are on hold for some time, the view the RBA had just a couple of weeks back on the economy could be very different now after a strong Aussie dollar rally and further weak employment data – but there is no way to tell.
We’ll just have to wait till the first Tuesday in March.
Disclaimer: Greg McKenna is an active currency trader who is short the Aussie dollar and very pleased his gold position is doing so well to balance this out.