The Reserve Bank of Australia released the minutes of its monetary policy meeting that took place on October 1. At the meeting, the bank reduced its key interest rate by 25 basis points to 0.75. The meeting minutes provide a clear picture of the global economic situation from Australia’s point of view.
The opening statement focuses on the US-China trade war, stating that ‘these tensions had led to a contraction in bilateral trade between the United States and China, which was resulting in the diversion of some activity to other economies. Members noted that the trade and technology disputes continued to pose significant downside risks to the global economic outlook’.
The RBA mentions that the services sector in most advanced economies remains stable due to strong labor market, but inflation remains low. Export is slowing. Industrial production in the EU has dropped, especially in Germany. Economic activity in Japan is also declining, with industrial production dropping by 1.2% MoM, exports have fallen by 8.2% YoY.
Here is the key note about the updated state of the Australian economy since last meeting, ‘the Australian economy had grown by 0.5 per cent in the June quarter. Year-ended growth had slowed to 1.4 per cent, the lowest outcome in a decade. Nevertheless, there had been a pick-up in quarterly GDP growth over the first half of 2019 compared with the second half of 2018. The pick-up had been driven by stronger growth in exports, led by exports of resources and manufacturing goods. Members noted that export demand was being supported by the lower level of the Australian dollar’.
The decline in global economy has opened the door to quantitative easing across most major central banks. On August 1, the Bank of Brazil (BoB) surprised markets by cutting its interest rate by a 50bp to 6%, against the the forecast of 25bp. It was followed by another 50 bp cut in September to the current reading of 5.5%. The Reserve Bank of New Zealand (RBNZ) followed suit with an unexpected cut of 50bp to 1%, against the forecast reading of 25bp.
On the same day, India and Thailand adjusted their policy down to 5.4% and 1.5% respectively. Amongst other nations, central banks of Mexico, India, Indonesia, Russia and China have all cut interest rates since August. Turkey and the European Central Bank have also introduced steps to boost the economy by cutting Repo rates and starting QE programs.
The interest rate in the euro area is 0%, while in such regions as Switzerland, Sweden, and Japan the key rates are negative: -0.75% in Switzerland, -0.25% in Sweden, and -0.10% in Japan.
The Bank of Canada is one of the few banks that have not cut rates in 2019, and according to the upbeat employment data released on Friday (the job increase of 53.7K exceeded the forecast by of 10K) and a drop in unemployment from 5.7% to 5.5% implies that monetary easing is off the table.
The US Federal Reserve also reluctantly cut the interest rate by 25bp in September.
The situation in global financial markets remains unstable. Markets are currently waiting for developments in the US-China trade talks: phase one of the deal is to be put in writing within up to 5 weeks. Traders are also following Brexit updates as Prime Minister Johnson will attempt to seal a deal at the EU Summit this Thursday and Friday.
Members of the RBA agree that a rate cut was a necessary measure to support employment and income growth and to provide greater confidence that inflation would be consistent with the medium-term target. They also acknowledge that the effect may be less than expected and that global risk remains to the downside.
In the closing note, the RBA states that they ‘expect that an extended period of low interest rates would be required in Australia to reach full employment and achieve the inflation target. The Board would continue to monitor developments, including in the labor market, and was prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time’.
Looking at the DTF in AUDNZD chart, we can see a line of a local uptrend, which has lasted since early August. The price bounced from the 61.8% Fibo level in mid-September and has bounced from the lone of the local uptrend.
Looking at the Ichimoku Cloud, we can see that its Base line and Conversion line are pointing up after a retracement. The bias is bullish. The RSI is pointing up (it is not in the overbought area), the Parabolic SAR is also pointing up.
Long positions seem to be a better option now. Wait until the price gets above 61.8% Fibo at 1.07999. The targets will be the resistance level at 1.08523, then 1.09064, and finally 1.10107.
If the price break the trend line down, first target will be the support level in the area of 1.06288