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Australian Dollar Catches a Bid on RBA Minutes but Enthusiasm Tempered by Familiar Warnings

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The RBA is satisfied with the domestic and international economic picture but many strategists still see it keeping interest rates on hold throughout 2018.

The Australian Dollar was seen higher against the majority of its G10 counterparts Tuesday after minutes from the latest Reserve Bank of Australia meeting showed policymakers holding an optimistic view of the economy.

Most significantly, there was a slight change in the language around the recent strength of the Australian Dollar, with policymakers seeming to downgrade their earlier warning over a further rise by the currency. 

"The appreciation of the Australian Dollar since mid 2017, partly reflecting a lower US Dollar, was expected to contribute to ongoing subdued price pressures," the minutes note. Although they add; "a material further appreciation of the exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast."

The more benign view of the local currency's strength has led some to suggest buying the Australian Dollar over the greenback even though it, and apparent satisfaction with the domestic and international economic backdrop, have done little to nudge interest rate expectations among economists.

"The RBA minutes reinforced our recent tactical long AUDCAD trade idea, as the Bank softened its language on currency strength," says Mark McCormick, head of North American fx strategy at TD Securities. "We also think the market is under-pricing risks of an earlier-than-expected RBA rate hike next year, which argues to buy into AUDUSD dips into year end."

But many economists still see the RBA remaining on hold throughout 2018 as wage growth remains weak and risks to consumer spending and the broader economy abound. 

Iron ore prices - iron ore being Australia's largest export and therefore a driver of the currency's value - are higher by a handy 2.15% today which could also help explain the currency's appreciation.

The AUD/USD rate rose 0.18% at 0.7856 while the AUD/EUR rate added 0.36% to be quoted around 0.6673.

The Pound-to-Australian-Dollar rate was was up 0.08% at 1.6909:

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What the minutes make apparent is the Aussie economy continues to tick along at a steady pace, which is supportive of the currency.

The RBA also notes global growth has been robust of late, supported by increasing consumer activity and investment, as well as low unemployment across many parts of the developed world.

“We have been encouraged by these minutes to expect that if the economy evolves in the way we anticipate, the Board will see no need to raise rates in 2018,” says Bill Evans, chief economist at Westpac.

“While the RBA does not release the detailed forecasts behind its general view that growth will be comfortably above trend next year, we can discern from the rhetoric that the Board, to date, has a more upbeat outlook for incomes; consumer spending; jobs growth; wages growth and the construction cycle than is our own view,” says Evans.

Why the RBA is not Likely to Raise Rates Anytime Soon

For the Aussie Dollar to catch a sustained bid markets would need to see evidence the central bank is gearing up for an interest rate rise in the coming months.

However, the RBA continues to emphasise that such a move is highly unlikely, which might keep the Aussie-bulls at bay for some time.

The positive notes on national and international economic conditions were accompanied by many of the same familiar refrains.

“Household balance sheets remained a key area of attention for policymakers. Household indebtedness remained high and had edged higher in an environment of low interest rates and weak income growth,” the minutes say, adding that many household will be sensitive to a rise in interest rates.

The RBA board also noted “financial risks remained pronounced” in the Chinese economy and financial system during the period.

Risks around the domestic inflation outlook remain given that, in other parts of the world, falling unemployment hasn’t led to a rise in underlying inflation pressures and a stronger Australian Dollar has already put downward pressure on prices.

“These risks to the outlook, along with ongoing spare capacity in the labour market suggest the RBA is still not ready to consider raising rates anytime soon,” says Janu Chan, an economist at St George Bank.

The RBA also recognised a broader move toward tighter monetary policy across the developed world, but reiterated that this would have no “mechanical implications” for Australian policy.

“Members also noted that monetary conditions in other advanced economies had been eased significantly more than in Australia since the onset of the financial crisis,” the minutes note.

This statement could be the result of increased speculation about Australian rates in the wake of the Bank of Canada’s September decision to raise interest rates for the second time in three months.

“We are maintaining our long-held view that the RBA will keep the cash rate steady into 2018,” says St George’s Chan.

The BoC’s move came at the same time as expectations mount that the Federal Reserve, European Central Bank and Bank of England will all tighten policy over the coming months.

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