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No Change from the RBA Today

The Reserve Bank of Australia (RBA)’s last monetary policy meeting ended today. It brought nothing new to the market, in line with expectations. 

The RBA already delivered more easing in November, so the expectations were that it would not do anything today and leave the “work” to the ECB and the Fed. Indeed, that may have been the plan, but the strength of the Australian Dollar (AUD) is not something that the RBA likes.

For this reason, every time a central bank delivers its monetary policy statement, traders must pay attention. It may be that there is nothing new in the statement, but there is always something new that the market may interpret differently.

Gold and AUD

One of the most curious divergences in the second half of the year is the one between gold and the U.S. dollar. The standard correlation between the two is that higher XAUUSD (i.e., gold) and lower USD represent protection against inflation. However, in the last couple of months, the markets diverged – gold fell from above $2,000 while the USD continues to weaken against other fiat currencies in the developed world.

For the RBA, this is a problem. The AUD has been one of the strongest currencies this year so far. Because gold and other commodity prices advanced as well, some pressure was taken from the AUD’s strength. As Australia is a big gold producer and has a huge mining industry, commodity prices are an important part of the RBA monetary policy decision.

The more the decoupling continues, the more uncomfortable the RBA will be with the strong currency. Yet, because it is December already, the cards for the year may have already been played.

Therefore, the RBA left the monetary policy unchanged – 10 basis points for the cash rate (effectively the lower boundary) and unchanged Term Funding Facility parameters. While it noted strong employment in October, it fears that wage pressures will remain subdued over the coming years.

As a consequence, the AUD pairs treated the event as they should have – like a non-event. This would likely be the norm with all economic events and central bank decisions this December, except for the NFP next Friday, as well as the ECB and the Fed’s decisions – this is why traders bother looking at markets in the weeks ahead of the end of the year holidays.

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