Aussie unwinds Monday gains as RBA softens policy stance

The run higher yesterday after the China news saw AUD/USD briefly move up above its 200-hour moving average (blue line). But ultimately, sellers held the line in pinning the pair down as the euphoria faded amid a more negative mood in equities. That continued into today before the RBA pushed the issue with the pair now down another 0.7% to just under 0.6400.

It’s pretty much back to square one again for AUD/USD as it runs back towards the lows seen last Friday. That puts the focus back on the April support region around 0.6362-89 and the August low of 0.6347 again.

So, what really changed from the RBA this time around?

There was only one notable change in their policy guidance passage. This is from November:

“While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint. This reinforces the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.”

And then this is from today:

“While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint. Recent data on inflation and economic conditions are still consistent with these forecasts, and the Board is gaining some confidence that inflation is moving sustainably towards target.”

Basically, they have shifted from the stance of reaffirming that policy needs to stay more restrictive and that they’re “not ruling anything in or out” to now being more confident that inflation is heading in the right direction.

It’s not an outright call to cut rates at the next step but this is the setting up for the platform to start talking about maybe cutting rates in the near future. There is no doubt that weakening economic conditions are on their minds as well.

This article was written by Justin Low at www.forexlive.com.