Australia Releases MPC Minutes

Daily Analysis - 16/06/2015

Policy Accommodation to Persist as Australian Dollar Exceeds Targeted Value


Monetary Policy Committee meeting minutes released overnight by the Reserve Bank of Australia underlined the need for continued accommodation amid the nation’s below-trend growth from the continued drag of domestic and international headwinds.

RBA Sticks With Accommodation

The Reserve Bank of Australia left the key rate unchanged at 2.00% during the last meeting of the Monetary Policy Committee on June 2nd. Much of the rationale for leaving policies unchanged was the challenging global dynamic with the meeting minutes discussing in depth the financial conditions in China, Japan, United States, and Euro Area. From a domestic standpoint, business investment continues to decline even on the backdrop of stronger household credit growth which grew at a 10.00% annualized pace according to the latest figures. Investment in mining and commodity sectors continues to contract with most domestic investment funneled to the retail and real estate sectors. Nevertheless, growth remains below trend, heightening the chance that the Central Bank will ease policy further and act to cut rates by another 25 basis points in a subsequent meeting to help stimulate the economy by pressuring the Australian dollar lower.


US Manufacturing Shrinks

The United States economy continues to buckle under the difficult conditions of the “new neutral” as a strengthening dollar causes demand for American manufacturing and industrial output to falter. Annualized industrial production figures released yesterday showed the figure slipped to the lowest since 2010, marking one of the steepest drops after factory orders dropped for 6-straight months. Adding to the cloudy outlook was the astounding collapse in the New York Empire State manufacturing index which instead of doubling as estimated contracted, printing at -1.98 versus expectations of 6.00. US equities fell at the open as concerns about the prospect of a Greek exit sent sentiment tumbling as investors sold dollars and pivoted towards commodities and precious metals. The Dow Jones Industrial Average closed in negative territory year-to-date, continuing to consolidate within a narrow range ahead of tomorrow’s FOMC decision.


Precious Metals Spike

Gold prices spiked in the afternoon following the close of the European cash equity session as creditors exert increased pressure on Greece to arrive at a deal after threatening preparations for a default that would likely include capital controls and bail-ins. There are concerns that the ECB will remove the backstop for Greek banks, thereby assuring a panic and bank run that depletes Greece of any remaining reserves. The weakness in the dollar saw gold prices spike by over 1% within the span of 5 hours as remaining shorts in the Euro continue to cover positions after revelations that the asset purchase program might be declared illegal by the European Court of Justice. That coupled with the disclosure that the Euro Area made a decision on how to handle a potential default which is contributing to the gains in the common currency.


GBPUSD Equidistant Channel Technical Pattern

After pulling back from election gains, the UK pound is back on the rise against other major currencies as the perceived stability of the nation versus peers outweighs the outlook for interest rates. The weakness in the dollar continues to contribute to gains in the GBPUSD pair which is presently trending higher in an equidistant channel pattern. The pattern exhibits a strongly bullish bias with the pair likely to continue appreciating if the UK economy shows stronger consumer inflation while US housing data remains suspect. The ideal strategy for taking advantage of the setup in the GBPUSD pair is initiation of positions from the lower channel line targeting the upper channel line. Taking positions fighting the prevailing near-term uptrend see risks increase while reward shrinks.


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