Aussie soars to two-year high on RBA minutes

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The Reserve Bank may remain reluctant to follow other global central banks in pulling the rate rise trigger, but that’s not preventing forex traders from piling into the Aussie dollar.

The currency has staged a remarkable rally following the release of the RBA’s minutes in which the board stuck with its ‘glass half-full’ view of the local economy but also surprised by discussing the level of an appropriate neutral interest rate, which could be seen as a sign the central bank is mulling a rate rise.

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Officials revealed that they now believe a cash rate of 3.5 per cent – well above today’s 1.5 per cent – would be the rate at which the economy would expand at a pace consistent with stable inflation.

The Aussie jumped nearly 1 cent to US78.77¢ on the minutes, its highest level since May 2015, after rallying 3 per cent last week.

The key issue for markets will be whether or not the discussion on the neutral rate is interpreted as some sort of signal, JPMorgan chief economist Sally Auld said.

“We don’t think this is the case – after all, the discussion is sympathetic with the RBA’s consistent description of policy settings over the past year as accommodative,” she said, referring to the RBA explicitly noting in the minutes that today’s neutral rate is well below the previous one of 5 per cent.

Capital Economics economist Paul Dales said the minutes suggested that the RBA is not itching to follow the Fed and Bank of Canada by raising interest rates in Australia.

Dales admitted the RBA’s discussion about the fall in the neutral interest rate could be interpreted as a sign that the Bank is starting to think about raising the cash rate.

“Indeed, the conclusion that the nominal neutral interest rate may now be 3.5 per cent (compared to 5.0 per cent previously) shows where rates eventually need to go.”

But while the RBA acknowledged that the economic outlook remains positive and that the recent strength of the labour market had “removed some of the downside risk in the Bank’s forecast of wage growth”, it doesn’t seem eager to pull the rate hike trigger, he said, adding the last paragraph of the minutes appeared to suggest that the RBA won’t raise interest rates just because other central banks have.

In the last paragraph of the minutes, the RBA juxtaposes the improving global outlook with the local outlook for growth and inflation, concluding that both the labour and the housing market “continued to warrant careful monitoring”.

“If we are right in thinking that rates won’t be raised until 2019, the Australian dollar may yet fall from US78¢ to US70¢,” Dales said.

But over the short term, the Aussie could well push higher still.

ThinkMarkets analyst Matt Simpson reckons the currency will soon test the US79¢ level before taking a bit of a breather.

“There is a tight zone of resistance between US79.17-23¢ which may lower the odds of a runaway move initially, but the conditions are ripe for this breakout to not turn into a bull trap,” he said.