Trading Currencies: Out of AmmoThe release of the Reserve Bank of Australia’s (RBA) September minutes was a clear declaration that it’s ‘out of ammo’ when it comes to monetary policy.
The minutes show that the Board is, (at this point) unwilling to entertain highly unconventional monetary policy tools such as negative rates or further quantitative easing policy and its only course of action is to ‘persuade’ fiscal policy to do more, something that is still falling on deaf ears.
This means the market knows the RBA can’t actually influence the Australian economy any further than it already is, which means, more importantly for traders, it can’t push down on the AUD.
This line from the minutes was the most ‘eye catch’ as it sums up the RBA’s dilemma:
“Members note that the AUD was broadly in line with its fundamental determinants, a lower exchange rate would provide more assistance to the Australian economy in its recovery.”
This comment basically concedes that there is no policy option on the table, and thus the AUD is free to roam as it requires, which would explain its continued push to test $0.74.
The ‘fundamentals’ the RBA eludes are solid:
Bulk commodities continue to strengthen as China continues to stick with its motto of “when in doubt, spend your way out”. For example, over the past three months Chinese iron ore imports have registered three record level which explains the why the price of iron ore is currently so high.
As observed from the trend of AUD/USD since the beginning of this year, we will notice that the pair has been on an uptrend since March.
Barring the Victorian issue, the Australian economy has recovered better than many global peers.
Couple this with the weakness in Europe and the UK as well as the disjointed recovery in the US, this all points to a strong AUD over the coming period, something the RBA would like to ‘right’ but just can’t.
The article is prepared by Lucia Han from Mitrade. Check out more about the company.