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This statement was expected to be the most boring ever. One need only look at the 2% probability of a cut priced into the swaps market, or exceptionally low overnight implied options volatility of 12% to see the market was clearly positioned for ‘boring’.
The end result of the statement has been a modestly lower AUD (AUD/USD is down about 10 pips at the time of writing) and a very slight bid in the Australian two-year government bond. This seems fair given the statement hardly oozes a central bank preparing the market for a cut.
There seems little concern for their inflation outlook, despite the AUD/USD pushing into the top of its recent range of $0.7700. Again, this is fair as the AUD/USD is only about 5% overvalued based on their internal models, which is by no means at extremes.
The statement itself is a whole 111 words longer than the September statement and Dr Lowe has clearly come in as a governor with something to say! We have a whole new paragraph on the labour market, although they maintain the belief that ‘forward-looking indicators point to continued expansion in employment in the near-term’.
Many will focus on the housing market and, once again, they have specifically targeted the apartment market as vulnerable. But we have also heard a real softening of concern around growth in lending for housing, with turnover in the housing market declining. This is a central bank that has the door somewhat open for further easing, but it seems very comfortable with policy at 1.50%.
We may need to see core inflation at 0.2% QoQ and a sharp pick-up in financial market volatility to compel the RBA to ease the cash rate in the months ahead.
However, the hurdle is still high and this notion that they are going to cut due to the AUD is misinformed. The current grind higher in AUD/USD and the trade-weighted AUD is not going to alter their current inflation projections.
For the AUD to really sell off, we will need to see a combination of USD buying, mixed with China coming back onto the front pages for all the wrong reasons, as this will cause an unwinding of the carry trade.