Australian Dollar Rises After Chinese PMI Beats, RBA on Deck

RBA monetary policy statement incoming: Markets eye comments on AUD strength

The PMI data comes roughly 3 hours prior to the Reserve Bank of Australia's policy meeting.

Australia's dollar is now a key stumbling block to the economy emerging as a competitive services-driven exporter, prompting Reserve Bank of Australia (RBA) governor Philip Lowe to warn on the implications of extending its surge. Moreover, Lowe actually said in his statement the terms of trade are expected to decline "over the period ahead".

Although they noted that "an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than now forecast", at its current level, the AUD has not materially affected their forecasts.

"Holding rates at their current highly accommodative level is appropriate to allow the economy to continue to gain momentum as the unwinding of the mining boom ends, the housing construction peak passes (but activity remains at a robust level for some time - ie no major drop) and, hopefully, other sectors pick up".

The Reserve Bank of Australia has unveiled its decision on interest rates following its monthly board meeting.

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"With the Australian dollar having rallied by 4¢ against the USA dollar since the last board meeting, the central bank could easily have shifted to more aggressively jawboning the currency if they were worried".

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, hovered around 2.72 percent, the yield on 15-year note flat at 3.02 percent and the yield on short-term 2-year traded almost 1 basis point lower at 1.81 percent by 03:50 GMT. Both CPI inflation and measures of underlying inflation are running at a little under 2 per cent. Inflation is expected to pick up gradually as the economy strengthens. This dragged the headline inflation rate for the year to June 30 to 1.9%, which is well below the RBA's target band of 2-3%. In other markets, housing prices were declining. The economy is nearly out of the reversal of mining investment that had been weakening growth of late - another bonus.

"Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending", he said.

There is also likely to be a short-term pick up in inflation, as measured by the consumer price index, as higher electricity and tobacco prices flow through. The weakness remains household debt - at a record 190% of income and among the world's highest - which is still outpacing income growth.

The jump appeared to be largely driven by increased foreign demand for British goods as the weaker Pound makes good produced in the United Kingdom more attractive to overseas buyers.

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