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Fundamental Report – April 2, 2013: RBA Keeps Rates Steady but Leaves Door Open For Cuts

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The Reserve Bank of Australia (RBA) held its benchmark interest rate steady at 3.0%. This level marks the record low, as the central bank looks to support the nation’s economic recovery prospects. The RBA’s decision to hold rates unchanged (rather than implementing further reductions) was based on improvements in household spending, eliminating the need for near-term action to reduce lending rates. RBA Governor Stevens made post-meeting comments, saying that economic indicators are making progress and that previous rate reductions have had a positive impact, thus far. These comments have led some analysts to speculate that the RBA is open to further cuts in interest rates later this year.

Lower interest rates have a negative effect on currency values (while having a positive effect on stock market values). The fact that rates were not reduced today was taken as a positive for the Australian Dollar, with the AUD/USD hitting new weekly highs (just below 1.05) after the interest rate decision was made public. Prices have since fallen back on the expectation that sellers are ready to establish positions into that key psychological level. Longer term, the argument can be made that further bullishness in the AUD/USD might be limited by the suggestion that the RBA is open to rate cuts later this year, but we are unlikely to see any major downside moves until late 3rd quarter (which is when the next rate reduction is expected).

Markets Look Ahead to Employment Data

Looking ahead, the next major event risk will be seen with the employment data figures out of the US. The first release will be the ADP employment report, which measures private employment increases for the month. This number is generally viewed as an early precursor for the main event for labor markets, which is the monthly Non Farm Payrolls figures. The ADP numbers will be released on Wednesday and are expected to show an increase of 200,000 jobs. This would be a relatively strong number and a small increase from what was seen the previous month (198,000 jobs). A positive number in the ADP report will increase the chances for a strong Non Farm Payrolls number on Friday. We are likely to see some slowing volatility into the numbers as traders are reluctant to take new positions before the data is released.



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