Daily Commentary BY THE CURVE TEAM –

RBA on Watch

16th of January, 2018

The Martin Luther King holiday in the US meant that there were a number of markets closed overnight but there was still plenty of action. In Europe, the EUR and the ECB outlook were once again front and centre while the USD weakness will have the RBA watching closely.

The holiday in the US meant that there would be even great focus on the activity in Europe and it didn’t disappoint. The release of trade data showing a growing surplus was accompanied by central bank comments on the outlook for ECB policy.

The comments this time came from ECB governing council member Ardo Hansson who said “If growth and inflation is evolving more or less in line with the projections, it would certainly be conceivable and also appropriate to end the purchases after September.” He also said that the need to taper purchases slowly might not be required, adding “I think we can go to zero in one step without any problems.”

While the focus has been on the surge in the EUR in recent days, there is a more broad trend of USD weakness. As a result, we are seeing the AUD pushing back up towards 0.80 with the next key level to watch being 0.8125.

This is something that the RBA will be watching closely. The RBA has repeatedly said in communiques that “An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

All other things being equal, a rising exchange rate results in tighter monetary conditions, which is the main driver behind the RBA’s repeated warning. The rising exchange rate is also likely to push out any expectations of an upward move in the cash rate.

David Flanagan

Director - Interest Rate Markets