Curve Daily Commentary, April 27, 2015

The Good, The Bad and the AUD

With the RBA now just over a week away from meeting to discuss the calibration of monetary policy, the outcome remains as unpredictable as ever following some key events Friday night.

The good news for the RBA, the government and the broader Australian economy is the continued recovery in the price of Iron Ore. Another 5% rally on Friday night as seen the price back up towards $60, well of its $47 low from earlier this month. Not only will it lessen the substantial impact that the collapse in the price was expected to have on the terms of trade, it will also be good news for the governments upcoming budget. 

The bad news howScreen Shot 2015-04-27 at 11.49.04 amever was the recent run of weak data continued in the US Friday night which has seen the market push the expected timing of the FOMC’s first rate hike further out. The timing of the FOMC’s announcement has significant implications for our own setting of monetary policy.

Then there is the impact that both the trends above has had on the AUD. The fall in the USD following the poor data in the US and the continued recovery in the iron ore price both pushed the AUD higher. The AUD is now trading back above 0.78 and nearing short term resistance. 

Ultimately the RBA’s biggest concern remains the AUD and as long it remains stubbornly high, then their easing bias will remain. Whether or not it is enough to warrant a further reduction in the cash rate cut remains debatable.