RBA Pauses and Here Is the Policy Update

RBA policy update

AUD: RBA leaves rates on hold & maintains the same forward guidance

The Australian dollar experienced a decline yesterday afternoon after the Reserve Bank of Australia (RBA) decided to maintain their policy rate at 4.10%.

As a result, the AUD/USD rate fell towards 0.6650, and the AUD/NZD rate approached 1.0825. In my previous FX Daily Snapshot as well, on ACY YouTube video Channel, I pointed out that the Australian rate market had already adjusted its expectations for consecutive rate hikes, anticipating a more cautious stance from the RBA. Nevertheless, economists surveyed by Bloomberg held mixed opinions on whether the RBA would implement another rate hike or maintain the status quo.

In their policy statement, the RBA stated that keeping rates steady this month would allow them to evaluate the effects of the previous rate increases and assess the economic outlook. Although the RBA acknowledged a further decline in the monthly CPI indicator for May, they still consider inflation to be "too high" and expect it to remain so for some time.

Encouragingly, recent labor market developments indicate a reduction in labor shortages, but the RBA remains cautious due to record-high labor force participation and an unemployment rate nearing a 50-year low. They anticipate that wage growth may increase, posing upside risks to their inflation target, as long as productivity improves.

The forward rate guidance from last month remains unchanged, with the RBA stating that additional tightening of monetary policy may be necessary to ensure inflation returns to target within a reasonable timeframe, dependent on the economy and inflation trends. This suggests that the RBA plans to implement at least one more 25 basis points rate hike this year.

The RBA also emphasized their close attention to inflation and labor market forecasts. Consequently, the Australian rate market has revised its expectations for future policy tightening from the RBA. Currently, there is a projected increase of approximately 10 basis points in the next policy meeting on August 1st and 34 basis points by the end of the year.

Confidence in the RBA delivering more than one additional hike in this cycle has diminished, which may negatively impact the Australian dollar's performance in the short term, alongside the recent slowdown in China's economy during Q2. The actions taken by Chinese policymakers to introduce further stimulus measures this month will be crucial in determining whether confidence in China's economy continues to decline.

LIMITED NEGATIVE SPILLOVER TO AUD PERFORMANCE SO FAR

Source: Bloomberg, Macrobond & MUFG GMR

Oil FX: Saudi Arabia & Russia attempt to provide more support for price of oil

Yesterday, Saudi Arabia made an announcement regarding the extension of its unilateral oil production cut for an additional month. The country will continue reducing oil production by 1 million barrels per day until August, with the possibility of further extensions, as stated by the Saudi Press Agency. This decision aims to support the price of oil, with Saudi Arabia expected to pump around 9 million barrels per day, according to Bloomberg.

Concurrently, Russian Deputy Prime Minister Novak declared that Russia would reduce oil exports by 500,000 barrels per day in August. Like previous production cut announcements this year, the market response to these policy updates followed a familiar pattern: an initial rally in oil prices, followed by a subsequent decline. Initially, the price of Brent crude surged to USD 76.60 per barrel, but it retraced to USD 75.00 per barrel, like its pre-announcement level.

Despite various production cuts announced in recent months, the price of oil remains close to year-to-date lows. These measures have, at best, provided some stabilization at lower price levels. However, commodity analysts anticipate that tightening supply and demand conditions will support a rebound in oil prices during the second half of this year.

Over the past month, oil-related currencies have shown mixed performance. The Norwegian krone (+3.6% against USD) and the Canadian dollar (+2.5%) have been the top performing G10 currencies since the end of May. This appreciation is primarily attributed to the hawkish repricing of rate hike expectations by the Norges Bank and the Bank of Canada.

Conversely, the Russian ruble (-9.0% against USD) has been among the worst-performing currencies, along with the Turkish lira, during the same period. After a brief consolidation period, the ruble resumed its bearish trend last month, which has persisted since late last year.

The currency has depreciated significantly, around a third, against the EUR and USD basket since the end of November last year, reaching lows recorded in March of the same year when it initially collapsed due to the Ukraine conflict. This downward trend underscores the disappearance of fundamental support for the ruble from Russia's record current surplus.

While Russia recorded a record current account surplus of USD 77.2 billion in Q2 of last year, the surplus has since narrowed significantly to more normal levels, amounting to USD 14.8 billion in Q1 of this year. For the whole year, the surplus is expected to contract by more than half compared to last year's total, which was slightly above 10% of GDP. This development poses challenges for Russia in financing its war efforts and raises doubts about their commitment to the planned oil production cuts.

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