RBA Surprised By Data Strength

The minutes of the April RBA meeting, released overnight, did little to detract from the bullish AUD case currently. While the records of the meeting confirmed that the RBA is certainly not looking at tightening any time soon (currently aiming for rate increases in 2024), there were some encouraging points for Aussie bulls which have seen buying continue in AUD across the European morning on Tuesday.

the minutes showed that the bank was surprised by the recent strength in domestic data which had surpassed its own expectations. In particular, Q4 GDP had firmly beaten the bank’s forecasts, suggesting that the Aussie recovery is happening at a quicker pace than projected.

Cautious Over Labour Market

However, the minutes were not all positive. The bank expressed concern over certain aspects of the economic outlook. The labour market adjustment that occurred during the pandemic, in particular, was a key issue raised. The bank discussed how, unlike other developed economies, the adjustment in the labour market happened via lower wage growth rather than a big fall in employment numbers.

With the bank forecasting that wage growth and price growth look likely to remain subdued for some time, it sees no risk of needing to tighten monetary policy in the near term. This is particularly interesting on the back of last week’s labour market data which showed that the unemployment rate fell back to 5.6% in March, its lowest level since before the pandemic began.

Near Term Employment Risks

However, despite the positive trend in employment figures over recent months, the RBA is forecasting that job gains are likely to stall as the end of the government’s JobKeeper program will inevitably lead to some redundancies. Additionally, the latest unemployment rate, 5.6%, is still well above the bank’s estimated natural rate of unemployment which sits at 4%, meaning that there is still quite some way to go before the RBA is satisfied with labour market conditions.

Looking ahead, there are clearly still hurdles for the Australian economy but in light of the trends of recent months it seems the risks are skewed to the upside. The country has so far been one of the most efficient in managing the virus though its vaccination effort has been slow so far. As vaccination numbers start to rise, optimism is likely to pick up further creating a bigger boost for AUD.

Technical Views

The rally in AUDUSD over the last week has seen price breaking out of the corrective bear-flag formation. Price is now testing the .7824 level which is a key pivot. If price holds here, there is the potential for the level to market the right shoulder of a head and shoulder pattern, with the neckline sitting at the .7564 level. However, a break above here will see bulls targeting .8003 first and fresh highs thereafter.

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