Australia is an important country for the financial market
for a number of reasons. First, it is the 14th largest economy in
the world with a GDP of more than $1.46 trillion. Second, it is a leading
producer of key commodities like coal and iron ore. Third, because of the
volumes of trade it does with China, the country is often viewed as a proxy for
investors looking to capitalize on the emergence of the country.
Today, the focus among investors was on the country. This is
because of the interest rates decision by the Reserve Bank of Australia (RBA).
In the decision, the bank left interest rates unchanged at 1.5%, which was
expected. The bank also sounded a bit hawkish, saying that it will continue to
pay close attention to the labor market going forward.
In the accompanying statement, the RBA started by talking
about the global economy. The governor said that global growth remained
reasonable with risks tilting to the downside. It attributed this to the
slowing down of international trade. As a result, the global financial
conditions remained accommodative, which has forced the long-term bond yields
to be low. In the country, the yields on bonds are at historic lows.
The bank now expects the Australian economy to grow by 2.75%
in 2019 and 2020. This growth will be supported by the increased government
spending on infrastructure and a recent pick-up of activity in the resources
sector. The main laggard for the economy will be low household consumption,
which is being affected by the low-income prices and declining house prices.
The labor market remains strong, with the unemployment rate
remaining around 5%. The bank now expects this rate to continue to decline to
about 4.75% in 2021. While this growth has continued, wage growth remains
elusive. The bank concluded that:
The Board judged that
it was appropriate to hold the stance of policy unchanged at this meeting. In
doing so, it recognised that there was still spare capacity in the economy and
that a further improvement in the labour market was likely to be needed for
inflation to be consistent with the target. Given this assessment, the Board
will be paying close attention to developments in the labour market at its
upcoming meetings.
Before the RBA decision, the country released the retail and
trade data. In the first quarter, the country’s retail sales declined by 0.1%,
which was the worst growth in more than 4 years. On a positive side, the trade
numbers showed an increase of trade surplus to above $4.94 billion.
In response to the RBA decision, the AUD/USD pair rose
sharply to a high of 0.7050. On the chart below, this price was above the
21-day and 42-day moving averages while the RSI rose sharply to almost 80.
While the pair may continue the upward trend, it might retest the 50% Fibonacci
Retracement level of 0.7000.
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