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Australian Dollar up +0.5% on RBA Decision to Hold Rates, but a 2019 Cut is Still Likely say Economists

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- Market expectations for a rate cut dashed

- Aussie Dollar rallies in relief

- Strong trade data also proves supportive

- 2019 interest rate cut still likely say economists

The Australian Dollar rallied in the aftermath of the Reserve Bank of Australia (RBA) meeting today at which policy makers left interest rates unchanged at 1.50% for the 33rd meeting in a row.

The decision does however confounds market expectations that soft inflation would see the RBA cut interest rates; indeed the market had been expecting a rate cut.

In a statement accompanying the decision the RBA did however acknowledge the softness of inflation and indicated that further jobs need to be created before inflation is likely to meet the RBA’s target.

So while an interest rate cut is still clearly a possibility for coming months, the surprise of opting to keep interest rates unchanged today have triggered a rally in the Aussie Dollar.

The Pound-to-Australian Dollar exchange rate is quoted at 1.8652 at the time of writing, down half a percent.

The Australian Dollar / U.S. Dollar exchange rate is quoted at 0.7035, 0.6% higher.

Currencies tend to fall when expectations for a central bank interest rate cut are in the ascendency, and the Australian Dollar has been trading notably lower as expectations for a cut grew: The level of the Australian Dollar on a trade weighted basis was the lowest on any RBA policy meeting back to 2009.

"With the meeting priced 40% for a cut and the A$ at multi year lows, we are not surprised by the reasonable jump in the Australian Dollar given no change in policy," says Robert Rennie, a foreign exchange strategist with Westpac.

Westpac expect this move in the Australian Dollar to continue to push towards USD0.7060/80.

"However, above that level we remain of the view that the Australian Dollar is a sell on strength," says Rennie.

Supporting the Australian Dollar further was data showing Australia's trade surplus remained elevated at A$4.9BN, only down a little from a record high of A$5.1BN for February (revised up from A$4.9BN).

A trade surplus is the result of a country exporting more than it imports and suggests more foreign currency is entering the country than leaving via the trade route, in turn supporting the Australian Dollar.

Markets were expecting a reading of A$4.5BN.

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Jobs Growth Keep RBA on the Sidelines

The decision to not cut interest rates by the RBA suggests policy-makers are placing more focus on the country's jobs market rather than inflation.

Australian economic momentum has slowed since the middle of last year and inflation has remained subdued.

But jobs growth has stayed very strong. Employment in Australia increased by 25655 in March of 2019, following an upwardly revised 10717 gain in the previous month and beating market expectations of a 12K rise.

"The Australian labour market remains strong," says RBA Governor Stephen Lane in a statement. "There has been a significant increase in employment, the vacancy rate remains high and there are reports of skills shortages in some areas."

The RBA say they expect the unemployment rate to decline further over time.

The RBA forecasts the unemployment rate to be 4.75% in 2021, for 2019 and 2020 the jobless rate is forecast to remain around 5%.

The RBA continues to expect inflation ”to pick up”, but to do so only "gradually”.

"Underlying inflation has been running under the RBA’s 2-3% per annum target band for over three years. The risk is it continues to take longer to get back in the band," says Best Deda, Chief Economist with St. George Bank in Sydney.

"Whether the RBA cuts the cash rate in coming months will boil down to the jobs market. In the final paragraph, the RBA said it needs further improvement in the labour market for inflation to be consistent with target. However, its broadly steady unemployment rate forecast until 2021 suggest a higher risk that a rate cut will be warranted," says Deda.

St. George Bank continue to expect the RBA’s next move in the cash rate to be a cut and in the second half of this year.

Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital says his expectation was that the RBA would cut at this meeting particularly given the weak March quarter inflation outcome.

But given the timing of the Federal election and the RBA’s focus on the jobs market, Oliver acknowledges it was a close call and in the event while the RBA has yet again lowered its growth and inflation forecasts it has opted to leave rates on hold for the time being.

Further details of the decision will be made known when the Minutes for the meeting are released in two weeks and markets should get a firmer feel for the direction of travel of Australian interest rate policy.

"Our assessment is that unemployment will drift up from here – not dramatically but to around 5.5% by the end of the year – and we continue to see the RBA cutting the cash rate to 1% by year end. We have pencilled in a cut for June but concede that the RBA may wait a bit longer given that there is only one month’s worth of jobs data to be released between now and then," says Oliver.

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