The Reserve Bank of Australia left the cash rate unchanged at 3.75 percent, disappointing expectations for a 0.25 percent raise to 4.0 percent. The RBA gave a couple of reasons for no change in rates and what they are looking to in the future:
“Inflation has, as expected, declined in underlying terms from its peak in 2008, helped by the fall in commodity prices at the end of 2008, a noticeable slowing in private‑sector labour costs during 2009, the recent rise in the exchange rate and a period of slower growth in demand. CPI inflation has risen somewhat recently as temporary factors that had been holding it down are now abating. Inflation is expected to be consistent with the target in 2010.”
“Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point. Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.”
“Interest rates to most borrowers nonetheless remain lower than average. If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.”
Source: RBA Statement
Australia has done well by not engaging in excessive quantitative easing and enjoys strong trading relationships with Asian countries such as China. The financial sectors in Asia have not been impaired like other parts of the world.
The Australian dollar plummeted on the news. AUDUSD and AUDJPY both spiked down about 100 pips, but have bottomed out there. Despite the bearish reaction for the AUD, it remains fundamentally sound. The economy is supported and growing, and with the highest rate of all major currencies, the AUD will gain from any carry trade demand. So we remain bullish the AUD. Use this weakness in the AUD to look for a cheaper opportunity to buy the AUDUSD and/or AUDJPY.
