The Australian Dollar is trading higher and the New Zealand Dollar is flat after the release of the Reserve Bank of Australia Monetary Policy Statement early Friday and ahead of the U.S. Non-Farm Payrolls report later in the session.
At 0330 GMT, the AUD/USD is trading .7964, up 0.0017 or +0.21% and the NZD/USD is at .7430, down 0.0002 or -0.03%.
In its quarterly statement on monetary policy, the RBA slightly downgraded its growth forecasts for the Australian economy while predicting a bounce back over the next few years as inflation returns to normal levels.
“The economy is expected to grow at an annual rate of around 3 percent over the next couple of years which is a bit higher than estimates of potential growth,” the RBA said.
“The outlook continues to be supported by accommodative monetary policy and an improvement in the global economy,” the statement said.
The RBA also noted, “Inflationary pressures would instead emerge more quickly if workers seek to catch up after a long period of low wage growth”.
The RBA also repeated its concerns over the Australian Dollar, warning that its forecasts for growth and inflation rely on the exchange rate remaining around current levels.
“Further exchange rate appreciation would tend to generate a slower pickup in economic activity and inflation than currently forecast.”
Even with its bullish outlook for the economy, the RBA still warned that continued slow wage growth could continue for “some time” and weigh on a consumption driven recovery.
“Some households may feel constrained from spending more out of their current incomes because of high levels of household debt,” the RBA said.
The RBA further added, “This effect would become more prominent if housing prices and other housing market conditions were to weaken significantly.”
Forecast
The RBA statement didn’t contain any surprises in my opinion. Now it’s up to investors to decide if it’s worth the risk to hold on to the AUD/USD at current levels until the economy grows enough to justify an RBA rate hike. Investors know about the risks because the central bank explained them.
One factor driving the Australian Dollar higher is the weaker U.S. Dollar and this is something the central bank can’t control. If the U.S. Fed continues to promote a dovish tone then the Aussie is likely to remain underpinned so there may not be much of a correction from current price levels.
Today’s U.S. Non-Farm Payrolls report could help determine whether the Fed sticks with its plan to raise rates at least one more time before the end of the year. If the numbers are strong enough to warrant a rate hike in September then the AUD/USD and NZD/USD are likely to weaken. If the numbers push a potential rate hike into December then the Aussie and Kiwi are likely to remain underpinned. If a bearish report lowers the odds of a rate hike this year, then the Forex pair are likely to rally.