Aussie Rates Lower For Longer

The Australian Dollar has turned lower again today with selling pressure resuming in response to the RBA March meeting minutes. The minutes added further weight to the bank’s conviction in keeping rates at current low levels until at least 2024 as highlighted during the meeting. While such a long timeframe might have been given in an attempt to help quash the uprising in yields, the minutes certainly rule out any adjustments until at least well into 2022/2023.

RBA Not Worried About Commodities Rally & Inflation

The most notable aspect of the minutes was the discussion around commodity price and inflation. The bank firmly pushed back against the idea that rising commodity prices would translate into sustained upside price pressures in the economy. Instead, the RBA pointed out once again that labour market conditions would need to be corrected in order to achieve such an impact. The minutes noted that members agreeing that “the international experience prior to the pandemic had underscored that a sustained period of tightness in labour markets would be needed in order to generate increases in wage growth”. The minutes went on to say that such conditions “even then, would put only a limited upward pressure on consumer price inflation.”

Wage Growth Needed For Inflation To Rise Sustainably

Governor Lowe has been firm in his message that the bank will need to see wage growth of around the 3% mark in order to have inflation back in its 2% - 3% band in a sustained manner. Given that wage growth is currently at 1.4%, this is someway off. The RBA currently judges that wage growth in that bracket is not likely to be seen until 2024, hence its outlook for rates on hold until that time.

Upside Risks As Recovery Grows

Australia has been one of the more successful countries in terms of dealing with the pandemic and, despite some sporadic, regional lockdowns, life has mostly returned to normal there. With the vaccination drive gathering pace, the country looks set to continue to normalise over coming months, which should see wage growth and inflation both lifting further. With this in mind, the conversation around rates is certainly not over yet and any upside strength in data will draw big focus from AUD bulls.

Technical Views

AUDUSD

The Aussie is currently penned in between support at the .7656 level and the broken bull trend line and structural resistance at .7814. In line with the longer term trend, the outlook remains bullish unless the .7563 low is broken. Below there, there is room for a run down to the .7413 level next.

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