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Published On: Tue, Sep 2nd, 2014

AUD/USD steady as RBA keeps rates unchanged and describes Aussie as overvalued

The Reserve Bank of Australia kept interest rates at 2.5 percent and commented on the strength of the national currency, which has remained stubbornly high despite declining commodity prices.

The RBA kept interest rates unchanged and commented on the strength of the AUD, which has remained stubbornly high despite declining commodity prices.

The Reserve Bank of Australia kept the overnight cash rate unchanged at 2.5 percent for a 13-th month in a row on its policy meeting on Thursday. Governor Glenn Stevens described the Aussie exchange rate as being above its fundamental value estimates given declining prices of main commodities. He went further by saying that the overvalued national currency is an obstacle for achieving of balanced economic expansion.

The RBA is attempting to boost growth in the country by stimulating different domestic sectors, including residential construction. The central bank hopes to avert a growth gap by encouraging the employment of past mine workers. The strong Australian dollar and pretty low company spending, however, are hampering RBA’s efforts and act as a brake on economic expansion.

Today’s statement of the institution marks a notable change in the language used for the AUD. This reflects the central bank’s awareness of the growing divergence between the Aussie exchange rate and commodity prices, especially those of precious metals and the iron ore.

With regards to the labor market, Glenn Stevens said that the latter “has a degree of spare capacity” and that some time will be needed before unemployment decreases consistently. The jobless rate in July rose to 6.4 percent, a 12-year high, while company profits declined 6.9 percent in the second quarter, compared to the first one.

The RBA Governor shared his observations about the growth in China as well, which was in line with estimates and with policy makers’ objectives. The biggest difficulty for Australia’s number one trading partner in the short-term, Stevens noted, were the underperforming property markets.

China’s Manufacturing PMI, released yesterday, showed manufacturing growing more slowly in August, compared to the previous month. This, combined with a slower rate of production, investment and credit growth, clearly demonstrates that the Chinese economy is decelerating.

The rate decision did not spur volatility in the Australian dollar. The AUD/USD was trading at 0.9291 as of 4:30 am GMT. Interest rate swaps data shows high probability of 4 basis points rate cuts in the next 12-month period.

Governor Stevens cited significantly declining investment spending in the resources sector. With regards to other sectors of capital spending he shared his expectations of moderate growth in the short-term.

The main Reserve Bank of Australia interest rate has been reduced in steps by 2.25 percent since late 2011, which has resulted in rising property prices and mortgage lending. According to the central bank’s official data, home loans to investors have increased by the impressing 8.9 percent on a yearly basis, from July last year. Home prices in Australia have grown with 4.2 on a quarterly basis.

RBA has kept rates stable for more than a year, and it does not seem to be in a hurry to make its move soon. In fact, that is the most stable period in eight years. Analysts believe that it will abstain from rate moves at least for another six months.

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