Originally published by AxiTrder
Quick Recap
The Australian dollar has climbed back from a low around 0.7580 overnight as the slightly weaker US dollar took the pressure off currency markets. Comments this morning from RBA governor Lowe which suggests he is happy with current settings but highlight the importance of next week's CPI data haven't impacted prices as yet. any further rate cuts in coming months is less likely than under his predecessor Glenn Stevens.
So, at 0.7630 this morning the AUD/USD is only marginally above the middle of the recent 75/77 cent range.
What You Need To Know
RBA governor Lowe gave his first formal speech as governor this morning and took the opportunity to discuss inflation and monetary policy.
Lowe was fairly even handed on his assessment of the economy at the moment but on balance my read of his speech is that he is leaning more to comfort with current settings and growth rather than towards an inclination that policy needs to be adjusted once again via rate cuts.
That's as long as inflation, and particularly inflation expectations don't deteriorate further.
The governor signalled that the board understood the negative impacts of low interest rate saying that 'in easing policy, the Board has been conscious that interest rates are already low – very low in fact by historical standards". He added "The Board has also been conscious that the low rates mean low returns for many savers.".
That translates to there is plenty of monetary accommodation in the economy and we know if we cut again a large pool of Australians will feel pressure on their incomes.
Lowes comments on employment, again even-handed, were possibly a little more suggestive of comfort with settings. He noted that on RBA staff estimates the current unemployment rate is only around half a per cent above the full employment level. He did say however underutilisation was up and people wanted more hours so the overall employment market isn't too tight.
So Lowe and the RBA is comfortable with where the jobs market is and it's worth noting in this regard that he said in the question and answer part of his address that the level of the Australian dollar and interest rates is appropriate for the economy at the moment.
But for me the most telling part of Lowes conversation, and the one which is most important for policy going forward, was his discussion about inflation expectations.
Lowe said:
"The low CPI and wage outcomes in Australia have seen some decline in inflation expectations, although not to the levels seen in many other countries. Consumer inflation expectations are lower than they were some years back, but are not at unprecedented levels. Market-based measures of long-term inflation expectations have also declined, but they remain consistent with the inflation target."
That might be so but as Lowe highlighted in his speech inflation expectations are informed by actual inflation outcomes.
Again, Lowe said (emphasis added):
"In terms of inflation, we have been looking carefully at the various measures of inflation expectations, which have clearly declined, although not to unprecedented levels. The experience elsewhere suggests that we do need to guard against inflation expectations falling too far, for if this were to occur it would be more difficult to achieve the inflation target. Of course, one of the key influences on inflation expectations is the actual outcomes for inflation. We will get an important update next week, with the release of the September quarter CPI."
This is doubly important because in the new agree between Lowe and Federal treasurer Scott Morrison specifically references inflation expectations.
So where does it all leave Aussie dollar traders?
Betwixt and between is the best summary I can find. The 20 day average true range of the AUDUSD has collapsed to its lowest levels the lowest levels since August 2014 just before the Aussie started its last big decline from 93 cents.
That's instructive insofar as tight ranges often lead to a volatility expansion. It's also instructive as the number of forecasters calling for a break of the Aussie dollar lower starts to mount.
It's also important because even though I am on record as saying I like the Aussie up to 80 cents in 2017 it is not yet the trade I have on. Where I sit is with everyone else. There is plenty of resistance in the 0.7750-7850 region and support is at 0.7450. A break either side will generate the vol expansion the collapse in the ATR suggests.
I'll be selling on any run up toward 77 cents at the moment.
Have a great day's trading