On 7 June the RBA announced that it would maintain the new policy announced at the previous May meeting4. Still, some key points from that meeting were reiterated. “... ...” as noted above.

As for the domestic economy “...recent data suggest overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators have been more mixed of late, but are consistent with continued expansion of employment in the near term... ...Inflation has been quite low... ...Low interest rates have been supporting domestic demand and the lower exchange rate overall is helping the traded sector...” The important point is that the Australian economy is growing and consumers have purchasing power as a result of accommodative policy plus low inflation; i.e., there’s demand for imported goods, exactly of the type the US exports to Australia.

The question then becomes whether the Fed would risk a rate increase when economic data has been erratic. It’s also important to note that the overall US unemployment rate is near record lows, but that wage growth has been stagnant. There have been some gains recently; however, that might be reflecting recent increases in the legal minimum wage recently legislated in many US states.

In her speech to The World Affairs Council of Philadelphia on 6 June5, Chair Yellen noted that “... 

The Chair then went on to some specifics observing that  “...net exports have been a drag on U.S. GDP growth over the past year and are likely to continue to weigh on growth over the medium term. This drag, in part, reflects the prolonged effects of the significant increase in the foreign exchange value of the dollar since the middle of 2014, a development that has been particularly challenging for U.S. manufacturers and other firms competing with foreign producers...”   

The point is that the Fed will likely remain cautious when it comes to policy. In particular, the potential for a June increase is virtually nil and does not exceed 50% until December.

Bilateral trade between the US and Australia is not heavily dependent on commodities, but rather on consumer or consumer related exports and the Fed would be reluctant to dampen related manufacturing in that sector with all other nations which import US manufactured products.

Hence, with the Fed on hold and the Aussie reacting more strongly to regional economic data, it is more likely that the Aussie will weaken vs the USD  then the other way around.

Mike Scrive
Technical Analyst
Accendo Markets

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1 RBA Media Release 3 May
2 US Fed Press Release 27 April
3 US BLS Press Release 3 June
4 RBA Media Release 7 June
5 US Fed Press Release 6 June