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RBA Holds Rates, FOMC Still to Come

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The RBA left rates unchanged yesterday as expected by a survey of economists; the RBA kept interest rates at 2.50% and did not substantially change the concurrently released statement dramatically. The bank kept the key phrase ‘a period of interest rate stability’ in the statement but discussed the level of the AUD in the wake of its recent decline:

“The exchange rate has declined recently, in large part reflecting the strengthening US dollar, but remains high by historical standards, particularly given the further declines in key commodity prices in recent months. It is offering less assistance than would normally be expected in achieving balanced growth in the economy.

Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.

In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”

The Australian dollar did not move much on the initial announcement, however the currency began to rally in line with broad US dollar weakness following Japanese Prime Minister Abe’s announcement that the weaker Yen was hurting small companies and households – rallying over a cent to reach 0.8833 against the US Dollar.

Abe’s comments fuelled a further sell-off in the USDJPY pair yesterday; the pair fell almost one and a half cents after the comments – part of a broader sell off since last week’s strong Non-Farm Payroll number. The Bank of Japan voted unanimously to keep monetary policy unchanged in a statement released after Abe’s comments.

Despite this sell-off in the US Dollar across various pairs, the currency has still appreciated quite strongly this year – likely putting downward pressure on imported inflation. Some members of the FOMC have been relatively hawkish recently, with a split between those who would like to see interest rates rise as soon as possible, and those who would rather err on the side of caution and wait for inflation to show up before acting on short term interest rates. This battle is what analysts are looking for in tonight’s FOMC Minutes including whether there is substantial debate about removing the phrase “The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends” as a conditionality on rate increases.

Also of interest later in the week will be Australian employment data. The ABS announced today that following criticism on two volatile data points in its employment data series that it will be removing the seasonal adjustment for the employment figure from July to September; the adjustment was found to be increasing volatility. Two of these removals involve adjustments to previous announcements and have already taken place – from the ABS:

“As there is little evidence of seasonality in the July, August and September months for 2014, the ABS has decided that for these months the seasonal factors will be set to one (reflecting no seasonality).

This means the seasonally adjusted estimates (other than for the aggregate monthly hours worked series) for these months will be the same as the original series and this will result in revisions to the previously published July and August seasonally adjusted estimates.”

As a result the previous figures were adjusted as follows -11,900 is the new July figure instead of -4,100 while August was adjusted to +32,100 instead of the previous record breaking +121,000. For traders using the previous estimates of the employment figure for tomorrow it may pay to note that these estimates are likely to be adjusted to reflect the lack of seasonal adjustment.

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