The Australian dollar rallied strongly and is now trading above .75 cents.
“I didn’t expect such a strong surge (on the Aussie) at the open this week,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
According to McKenna, what was interesting was how the surge in South Korean exports seemed to change sentiment in Asia yesterday.
“We saw the focus shifted away from the weaker than expected Chinese PMI’s over the weekend. And Australia had some solid data as well with the release of a very strong manufacturing PMI result for April,” he added.
McKenna said that changed the tone “but it seems that the Aussie’s rally got a little extra oomph from the solid move higher in the Kiwi which closed last Friday at 0.6862 but is now sitting at 0.6912 up 0.72%.”
With the Aussie sitting at 0.7526, up about 50 points from around this time yesterday, markets are looking to the RBA’s decision on interest rates this afternoon and what the governor says about the economic outlook here and abroad.
“My guess is the abroad bit is going to be upbeat. My sense is they acknowledge last month’s positive employment gains but still remain cautious about the overall strength of the labour market and underemployment,”
“My bet is they’ll (RBA) also note that inflation is back in the target band – headline – but also note underlying price pressures remain subdued. And that wages growth is still weak,” McKenna said.
From his perspective, McKenna said there is no doubt the RBA will be happy that house prices look like they fell in April.
He added, “I expect further comment on lending and housing which remain a handbrake to further cuts. And my sense is the wash-up is that rates will be on hold with a communicated neutral bias on monetary policy.”
At the same time, McKenna believes the risks of a slowdown have increased. And increased materially.
“I say that because this is very much a be careful what you wish for kind of environment right now. Australians might be able to afford high house prices and larger loans because rates are so low, but they have done so by stretching themselves to the extreme in the hope of getting rich in the property market,” McKenna noted.
Already the RBA has mentioned recently that around 30% of indebted households have no buffer in their income and outgoings.
The latest release of the long-running survey of 32,000 households conducted by Digital Financial Analytics suggests there is growing “stress momentum” in Australian households.
“The RBA knows this. Which is why I would dearly love them to try for a non-housing boosting stimulus by signalling that the path to a cut is open and that it, along with the Council of Financial regulators, will rein in debt and house price growth,” McKenna said.
That will knock the Aussie dollar lower if it happens as it will reinforce a notion held in many quarters that the RBA is probably the only major central bank – apart from Sweden’s Riksbank – who could ease this year.
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