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AUD fell from 0.7450 to 0.7381, a result of USD strength while the Reserve Bank (RBA) appears to be progressively buoyant that the Australian economy is evolving as desired in the RBA’s quarterly Statement on Monetary Policy (SoMP).
The RBA is painting a story of an economy growing at a bit above estimates of potential growth, but inflation pressures remaining muted.
The Aussie central bank projects the unemployment rate to reach around 5 percent by the end of 2020, as flagged earlier this week. The indication of reaching an unemployment rate of 5.0% is important as it provides an explicit expectation by the RBA that the economy will approach full employment.
Inflation is not expected to reach the middle of the RBA’s 2 to 3 percent per annum target band over the RBA’s forecast period, until at least the end of 2020, despite expectations of strength in the domestic economy and the labour market.
Most noticeably, the changes in today’s SoMP is the RBA’s inflation projections. The RBA has relegated forecasts for CPI, although it has left its medium-term forecasts unchanged.
The RBA continues to indicate that the next move in the cash rate will be higher, which is consistent with the view of an economy growing a bit above potential, and a falling unemployment rate. Nonetheless, ongoing low inflation and slow wage growth suggests little need to raise interest rates any time soon. We continue to expect the RBA will leave rates on hold for some time.
The Aussie underperformance has continued on the robust US dollar strength following the FOMC and ECB mid-June meetings but so far in July it has been near the middle of the G10 pack. In addition to that, weighing on AUD have been a pullback in key commodity prices, especially metals, bouts of investor concern over US-China trade tensions and the Fed's ongoing optimism on the US economy.
Well, overall RBA outlook to remain to be on hold throughout 2018 and is anchoring short-maturity interest rates and should keep 3yr swap rates in a 1.80% to 2.30% range, as long as core inflation remains below 2%. Longer maturity rates will largely follow US rates. Courtesy: St.George and Westpac
Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards -135 levels (which is highly bearish), while hourly USD spot index was at 131 (bullish) while articulating (at 06:37 GMT). For more details on the index, please refer below weblink:
