Fundamental analytics

Australian Dollar Resists Signals from RBA that 2018 May Contain Zero Interest Rate Hikes

AUDUSD

The Australian dollar is poised to end trading on Friday with broad weekly losses against most of its major peers, even after posting some gains today despite new remarks on economic conditions from the Reserve Bank of Australia. The Australian currency displayed resilience today regardless of additional negative pressure from the nation's statistical office after releasing disappointing data for the housing market.

 

The Australian dollar gained 0.04 percent to 1.5734 against the euro on Friday but remained down by 0.02 percent this week. Versus its U.S. counterpart, the Australian dollar moved 0.22 percent higher to 0.7798 but failed to erase a large drop of 1.59 percent on a weekly basis. The British pound also gave up some ground against the Australian dollar today, declining by 0.13 percent but still headed to end the week with 0.14 percent increase so far.

 

In a quarterly monetary policy statement that provides commentary on economic conditions and inflation, the Reserve Bank of Australia has left its long-term forecasts unchanged. The central bank struck a dovish tone, stating that economic growth is expected to have a minor increase in the next two years while core inflation may have a gradual progression towards 2 percent by the beginning of 2019.

 

Even when expanding the reach of its forecasts to mid-2020, the central bank still sees core inflation at around 2.25 percent, which reflects expectations of a very slow upturn in consumer prices over the long run. These forecasts from the central bank were basically unchanged from the insights it provided in the previous monetary policy statement in November 2017.

 

The RBA is certainly in no hurry whatsoever to raise interest rates, even as central banks in other major economies began taking steps to normalizing monetary policy. The Australian central bank is looking very unlikely to introduce any change to its 1.5 percent cash rate in 2018.

 

Adding more pressure on the Australian dollar, the monetary policy statement also mentioned increases in the currency's exchange rate. Policymakers pointed out yet again that a stronger Australian dollar will inhibit economic growth and dampen inflation outlook. The central bank expects the gross domestic product to increase by 3.2 percent in 2018 and 2019. However, the repeated remarks came as no surprise to investors, which allowed the nation's currency to resist downward pressures today.

 

On a separate note, a report from the Australian Bureau of Statistics revealed a lackluster home financing activity in December. Home loans fell by 2.3 percent in the last month of 2017 following a 1.6 percent gain in November, despite estimates of a smaller drop by 0.9 percent. The data is not a major release, which helped the Australian currency in showing little to no reaction to it today.

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