The bank has been cutting interest rates to spur growth and inflation for some time and this was one of the reasons that we had such a bad selloff for the currency. Having said that, commodities have bounced back sharply and we can see that the Bloomberg commodity index has entered into bullish territory. Moreover, the rebound in oil prices have been remarkable and should soon start to feed into the inflation equation.
Hence, on the 7th June, the RBA has refrained from any kind of further rate cut. The bank has kept their door open as they want to assess the impact of their recent easing strategy.
We do think that the strategy adopted by the bank is the right one, particularly if you look at the economic data where you will see that the real GDP QoQ data for the Q1 has improved and consumer sentiment has moved higher to 103.18 in comparison to last month’s reading of 95.14. However, business confidence, industrial production and consumer prices are still very fragile and there is a lot more support needed by the Royal Bank of Australia if we are to be confident that the country is out of woods with a steady Australian Dollar.
It is important to emphasise the importance of a weaker currency. The aim of the Central Bank is to encourage other countries to import goods from their country. By looking at the most recent Chinese Trade balance data, the number which jumps out the most is the iron ore import from Australia. This number has surged to 13.2% y/y in Dollar terms and this is the first time we have seen this surge since Aug 2015, it is a massive turnaround from the previous month which was at -15.1%.
The chart shows that we are trading between Mays highs and lows. We envisage that if the economic data continues to improve, the Aussie Dollar has more of a chance of a positive increase.