Australian Dollar Gains As RBA Looks To Higher Rates. Eventually

AUSTRALIAN DOLLAR, RBA AND CAIXIN PMI TALKING POINTS

• The RBA sounded a modestly upbeat note
• It said that rates would have to rise if the economic growth it expects is duly delivered
• China’s private service sector had a good April

The Australian Dollar made modest initial gains Friday on an upbeat statement from the Reserve Bank of Australia which saw and inflation foreasts revised higher.

The central bank now sees inflation at 2% annualized this year on average, above the previous 1.75% call. Crucially this would take pricing power back within the 2-3% target band from its curent position just below it. The RBA tips 3.25% Gross Domestic Product growth by December and looks for the same next year.

It also said that higher interest rates would be appropriate at some point if the economy continues to improve as expected. However, the market still does not see any near-term rise in the record-low, 1.5% Official Cash rate with no increase priced in to futures contracts until well into 2019.

The RBA also said yet again that significant AUD appreciation would make growth and inflation targets harder to hit.

AUD/USD blipped higher in the aftermath of the report and is looking more comfortable above the 0.75 handle. That said it is doubtful that this report does anything to bring higher Australian rates closer.

CHNA CAIXIN PMI SHOWS IMPROVEMENT

The currency continued to gain following the release of the Caixin snapshot of April’s private sector service activity in China. That Purchasing Managers Index came in at 52.9, above the 52.3 expected. Coupled with the manufacturing survey already released that made for a composite PMI of 52.3, well above the previous month’s 51.8. In the logic of PMIs any read above 50 signifies an expansion of activity.

All up this was another good survey for China’s economy, which seems to be weathering trade-war talk pretty well. The Australian Dollar can sometimes act as the markets’ favorite liquid China proxy thanks to Australia’s famed raw material export links to the world’s second-largest national economy. It may have done so to a limited extent in this case.

On its daily chart AUD/USD remains under extreme pressure. This is in part thanks to the gulf in interest-rate expectations between a Federal Reserve well on the monetary-tightening path and a Reserve Bank of Australia still on hold. The idea that the RBA is quietly pleased with current Australian Dollar weakness is probably also weighing.

AUD/USD has found some support around the key lows of last December, which preceded its climb up to the peaks of February, 2018. However, should that support give way then the lows of last June around 0.7389 would come into focus for bears.

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