Yesterday saw the Reserve Bank of Australia release its Interest Rate decision for the month of September. Forecasts were for rates to remain on hold at 2.5% and the RBA did not disappoint.
As always it is the accompanying speech from Governor Glenn Stevens that had the market on edge as to what may be the future for rates and the reasons behind why rates remained unchanged. To paraphrase he stated that’’ unemployment had increased recently despite some improvement in most other indicators for the labour market this year’’.He went on to say that the ‘’Banks assessment remains that the labour market has a degree of spare capacity and it will be some time before unemployment declines consistently ‘’.
He also spoke about stagnant wage growth stating that ‘’growth in wages has declined noticeably and is expected to remain relatively modest over the period ahead ‘’. Basically, with higher unemployment and lower wage growth leading to lower inflation we can interpret that to mean that rates are going to remain on hold for much longer than previously expected , in fact the next rate move may be to the downside if the economy continues to contract.
The last point to touch on, once again he talked down the Australian Dollar saying that the ‘’exchange rate on the other hand remains above estimates of its fundamental value particularly given the declines in commodity prices ‘’ leading us to believe that even though we are seeing some continued strength in the Australian Dollar it may not be sustainable if the fundamentals do not warrant such strength.
Following on from Stevens speech, we did see strength in the Aussie dollar against most majors and overnight that strength continued against the Pound and reversed significantly against the US Dollar and the Euro.
Last night in the UK we saw the release of Construction PMI which saw the strongest growth in seven months.Construction activity helps create jobs but also saw suppliers struggling to keep up with the supply of product .Estimates were for a reading of 61.5%, with the numbers easily beating forecasts with a reading of 64.0 .Lower interest rates from the BOE have helped spur this growth after the housing market received such a blow after the 2008 GFC.
Today in Australia at 11.30am AEST we see the Australian GDP announcement with analysts forecasting a reading of 3.0% which would indicate a slowdown from the previous months reading of 3.5%. If this eventuates we could see continued Dollar weakness heading into the UK and U.S trading sessions .