The Reserve Bank’s predicted decision to sit pat on interest rates yesterday had little impact on financial markets – investors ignored that and another big sell-off in commodities to send the ASX 200 to a two month high (the only commodity not to weaken was iron ore).
But after the RBA revealed it was sitting pat and changed its wording on the way the dollar has been performing, the market faded to be up 18.6 points (instead of more than 40 points) at the close.
That was despite a solid 3.7% rise on the Shanghai market yesterday after several days of falls.
But the big driver of the strength in the Aussie dollar yesterday was the larger than expected 0.7% rise in retail sales for June, against market forecasts for a rise of 0.4%.
June’s rise of 0.4% was revised up from the originally reported 0.3%. That added to the upbeat sentiment which was further boosted by the RBA Governor’s comments on the dollar.
That helped the dollar jump more than three quarters of a cent back to high of around 73.85 US cents – up 1.3%. It later retreated to around 73.60 US cents.
The jump was after the RBA changed the tone of its comments on the dollar – saying in yesterday’s post meeting statement from Governor Glenn Stevens that “the Australian dollar is adjusting to the significant declines in key commodity prices”.
That is quite different from the the comment in the June statement from Mr Stevens that “further depreciation” of the $A “seems both likely and necessary, particularly given the significant declines in key commodity prices”.
So the dollar responded (thanks to the stronger than expected retail sales figures) by rising strongly, back over 73 US cents and if it can, back towards 74 US cents, especially if the current sell-off in commodities slows.
Apart from the change in language about the dollar, the rest of yesterday’s statement was substantially the same as June’s. That includes the last two paragraphs, the key to the post meeting statements from the Governor.
"In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending,” he said in yesterday’s statement.
"Credit is recording moderate growth overall, with growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities.
"The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates. The Australian dollar is adjusting to the significant declines in key commodity prices.
"The Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Further information on economic and financial conditions to be received over the period ahead will inform the Board’s ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target,” Dr Stevens concluded.
Other recent data supports the RBA – building approvals remain solid, inflation is under control and moderate, early corporate profits are reasonable for the June 30 year and manufacturing seems to be responding to the lower dollar.
But the trade figures yesterday showed a deficit of $2.9 billion, up 10% from May.
