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RBA minutes show wait for inflation data before any rate cut

Publication date: 17 April 2012
Author: Andrew Timothy Robinson, Saxo Bank

Today’s highlight for the Asian session was the release of the minutes of the April RBA meeting, where we gained further insight into the central bank latest ideas regarding the economy and interest rate policy.

The RBA set out its stall for the May meeting with discussions centering around the case for a rate cut IF the Q1 inflation data justify. In a similar vein to the post-meeting statement, members thought it prudent to wait for the inflation data before considering a cut, though a lower assessment of the pace of growth and demand would likely filter through to a benign inflation environment. The RBA acknowledged the sharp divergence between sectors of the economy with weakness noted in housing and building activity. It also argued that the labour market may be softer than the headline unemployment rate and higher participation rate suggested, with a drop in hours worked noted. The RBA also noted that the AUD remained high despite easier terms of trade. AUD showed limited reaction today – only a 10-15 point fall versus the dollar and a 20 point rally in AUDNZD.

In other releases, China reported lower foreign direct investment for the fifth straight month in March. Inbound investment fell 6.1 percent from a year earlier to $11.76 bln, according to the Ministry of Commerce, following a 0.9 percent decline in February. For the first quarter of 2012 investments totaled $29.5 bln, a fall of 2.8 percent from the same period in 2011.

While on China, the State Administration of Foreign Exchange (SAFE) announced a further adjustment of FX rules whereby banks’ net open position regulations are relaxed and short USD positions are now permitted. This should ensure a bit more liquidity for a 2-way market and, coming on the back of the weekend widening of the daily trading band, is likely to encourage more 2-way activity in both onshore and offshore Renminbi trading.

EURUSD had one brief dip below the key 1.30 level early in the European session yesterday – and that was it. The subsequent slow grind higher forced those who had built up short positions – ready for a break lower – to bail out, and the pair squeezed steadily higher throughout the rest of the session. However, periphery debt issues continued to threaten, with Spanish yields rising back above 6 percent.

US data was mixed, with retail sales rising a strong 0.8 percent m/m and excluding autos/gas also a firm +0.7 percent m/m, but the Empire manufacturing index slipping back towards the zero expansion/contraction threshold with a 6.56 reading after 20.21 the previous month. Sub-indices showed new orders holding steady at 6.48 while employment rose to a cycle high 19.28. Prices received were the highest in 4 months though shipments were down sharply. Business inventories were bang in line with forecasts but the NAHB housing market index dipped to 25 in April from 28.