RBA's easing bias, US housing data

Forex News and Events

RBA leaves room for rate cut

The publication of the RBA’s minutes from the May meeting shows that the Bank left the door wide open to further monetary policy easing move. The minutes contrast with the less dovish statement accompanying the rate cut. At that time, the rate cut had only a temporary effect on the Aussie as it was broadly expected and therefore already priced in by traders. In addition, the lack of clarity from the RBA is confirmed by the minutes as it shows that the members clearly retained an easing bias while markets participants expected no further rate cut, interpreting the move to refrain from providing guidance as a sign that the cash rate reached a bottom. “Members agreed that, the statement communicating the decision would not contain any guidance on the future path of monetary policy”, the minutes said.

On the housing market front, the minutes revealed that the rate cut could feed imbalances in the housing market. However, the members noted that housing price growth was strong in Sydney and Melbourne but subdued or even negative in the rest of the country. The RBA declared “The Bank would continue to work with other regulators to assess and contain the risks arising from the housing market”. The recent disappointing data from China will definitely not help improving the Australian economic conditions. As a reminder, China’ industrial production for April came in below expectation at 6.2%y/y (6.3% exp, 6.4% prior) while data on Monday indicates that China’s house prices decline further. AUD/USD moved lower since April 14 and we expect the Aussie to depreciate further in the medium-term as the RBA’s easing bias, together with the upcoming rebound in the US economy will weigh on the pair.

US Housing Starts (by Yann Quelenn)

April US Housing Starts report will be released this afternoon. Yesterday, NAHB homebuilder’s sentiment came in below expectation at 54 versus 57 consensus but still above 50, showing confidence in the housing market. New residential construction projects’ expectations are at 1015K compared to 926K prior read. Building permits’ expectations are at 1064k versus 1042K in March. Current number of housing starts is well below building permits reflecting the recent weakness of the US economy. Good data will help supporting the acceleration of the US economy and allow the dollar to strengthen further.

The latest economic data, including retail sales, industrial production or consumer confidence printed lower than expected. Rates are pressured downwards. We anticipate rate hike will be postponed even after September, or even set aside for a while. EUR/USD price action is driven by Greece’s uncertainties. The pair has just broken the resistance standing at 1.1220 (61.8 Fibonacci 1-month- retracement) after Benoit Coeuré’s from the ECB declared that the central bank intends to accelerate QE before summer. Good US Housing Starts will push the pair below 1.1220 and opening the road toward 1.1100.

EURUSD - Bouncing back