The Australian dollar has had a busy start to the week, with economic data out of Australia and China sending the commodity currency on a wild ride. Tomorrow, the RBA’s minutes from its policy meeting this month will be closely analysed by the market for any clues regarding future policy decisions from the RBA.
At its meeting earlier this month the RBA elected not to move interest rates. The bank has all but removed its easing bias and the market wants confirmation that the bank is indeed getting comfortable on the sideline. The RBA appears content to remain in a wait-and-see mode as prior easing finds its way into the economy; easing which it apparently believes should be sufficient to pull the economy through its transition away from mining investment.
Our concern is that the transition away from mining investment is going to be significantly rougher than the RBA currently expects; largely because we aren’t seeing non-mining sectors of the economy gearing-up to pick up the slack left behind by dwindling mining investment. And, the RBA’s prior rate cuts aren’t gaining traction in the real economy. In fact, the residential property market and consumer confidence indicators are the only headline economic measures which have reacted significantly to the RBA’s massive easing cycle, and the latter can probably be attributed to a turnaround in global investor sentiment.
While we expect the RBA may have to cut rates again, this sentiment isn’t likely to be echoed in this month’s meeting minutes. Instead, we don’t expect the minutes to stgiate significantly from RBA Governor Stevens’ statement following its policy meeting earlier this month, thus the minutes may have a limited impact on the Australian dollar.
Mixed Chinese data sent AUDUSD on a wild ride
However, China’s economic data is having a big impact on the Australian dollar. AUDUSD gapped lower this morning due to weak export figures out of China over the weekend. China’s exports completely missed the mark in September; falling 0.3% y/y, against an expected increase of 5.5%. Imports, however, increased more than expected at 7.4% y/y. While China is hoping to transition to an import based economy, we don’t think a massive drop-off in exports is quite what Beijing had in mind. China’s strong import number suggests that domestic demand is on the right track, but the world’s second largest economy still relies heavily on demand for its goods and services from offshore to promote growth.
Later in the session AUDUSD ignored poor local housing data in favour of higher than expected Chinese inflation data, which wasn’t quite high enough to be worrying. Consumer prices in the world’s second largest economy rose 3.1% y/y to September, beating an estimated 2.8% rise but still under Beijing’s 3.5% target for this year. The data sent AUDUSD shooting higher and provided the momentum the pair needed to retrace all of its losses on the back of China’s weak export data.