Central Bank News ((R B A) Statement by Philip Lowe > Governor Monetary Policy Decision (07-Nov-2017)

(RBA) Statement by Philip Lowe, Governor: Monetary

 Policy Decision (07-Nov-2017    at   08:41:50 am)

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per 

cent. Conditions in the global economy are continuing to improve. Labour markets 

have tightened and further above-trend growth is expected in a number of advanced 

economies, although uncertainties remain. Growth in the Chinese economy is being 

supported by increased spending on infrastructure and property construction, with 

the high level of debt continuing to present a medium-term risk. Australia's terms of 

trade are expected to decline in the period ahead but remain at relatively high levels.

1) Australian Dollar Ticks Up As RBA Holds Rates
2) US Oil Secures Breakout but Where Will it Generate Follow Through?

1) Australian Dollar Ticks Up As RBA Holds Rates

The Australian Dollar rose slightly Tuesday after the Reserve Bank of Australia left 

interest rates on hold, as had been widely expected.

The Official Cash Rate remained at its record low of 1.50%. The RBA’s accompanying 

statement offered few changes from the previous edition which makes the market 

reaction a little mysterious. It is possible that some were looking for a more dovish 

tinge to this month’s commentary in the wake of disappointing inflation data, or 

perhaps more strident railing against currency strength.

The RBA said that its forecasts for economic growth were largely unchanged. It 

added that steady policy was consistent with both meeting its consumer price target 

over time and achieving sustainable economic growth. It also said that a rising 

Australian Dollar would slow the economy, but markets seemed to take little notice 

and bought it anyway.

It is possible that trading desks are more thinly staffed than usual because of the 

Melbourne Cup horse race, which takes place Tuesday. This is an enormous event it 

the Australian sporting calendar and can lead to holiday-like trading conditions in 

the market.

In any case, interest rate futures markets do not price in any interest-rate move until 

early in 2019, by which time they predict that the OCR could have risen by a quarter 

percentage point.

The RBA has certainly not seemed like a central bank in any hurry to raise interest 

rates lately. The minutes of its last policy meeting found it pugnacious, asserting that 

it would not necessarily tighten its own policy in response to such moves elsewhere.

The central bank’s dilemma is that while Australia’s external, export sector is 

performing well, eye-watering levels of personal debt, subdued wages and restrained 

consumption restrain the domestic economy.

On its daily candlestick chart AUD/USD remains very much mired in the downtrend 

which has contained all the action since September 20. That downtrend is itself part 

of a broader slide from 2017’s high, made on September 8 at 0.8121.

2) US Oil Secures Breakout but Where Will it Generate Follow Through?

Friday saw an incredible breakout from US-based WTI crude oil 

and Monday’s session acted to confirm it was a strong, nearly 2-dollar per barrel 

follow through. This is a convincing move it taken purely from a technical 

perspective. But, nowadays, technical evaluations alone creating more false positives 

than valuable signals. Nevertheless, we shouldn’t write off the remarkable 

performance of the commodity that we have seen in the last 48 hours of active trade. 

The $55 level that we cleared at the end of last week was a range high that was tested 

and rejected multiple times stretching back two-and-a-half years. Follow through of 

the magnitude registered this past session is often a sign of enthusiasm and 

therefore an ingredient for conviction. In terms of subsequent major technical levels 

that we could use as milestones for purely a technically-oriented view of the market, 

there isn’t much but open sky. Some of the more noteworthy levels includes the 2015 

highs around $60-62, the 2011-present mid-point around $70 and then open air. I 

conducted a poll of oil bulls to see where they think this swell of momentum would 

carry us.

we have seen so many unfulfilled technical breaks across various asset classes 

that hopefully we rely on more than just a chart pattern to assess our basis of 

conviction. If we were to do so, the picture grows very murky – much as it has with 

other assets when we do a more complete evaluation. To do a comprehensive 

evaluation, I look at the supply-and-demand factors of the market for a fundamental 

assessment (risk-oriented motivation has waned more completely here than most 

other asset classes) as well as a market participation evaluation. For supply-demand, 

the story has long been an overproduction of the commodity that has swamped a 

market that has not seen growth that can facilitate the demand to mop it up. Looking 

to OPEC production, we can certainly see the effort to take the top off of some 

output, but it is not a substantial production. From the US sources which have 

created much of the problem, we still register records. Meanwhile, demand in the US 

and globally is still offer little in the way of a hope to quickly reverse trends.

Without a clear milestone on what the market considers a key level in the supply-

demand level in the market, we find better statistical correlation between oil’s price 

and inventories in the United States. Far better a relationship exists however, when it 

comes to the commodity’s price and the CBOE’s oil volatility index (ticker = OVX). 

While not as distinct as the relationship between the S&P 500 and VIX, the 

relationship between crude and its volatility measure is distinctly negative. With the 

latter at extraordinary lows, the risk of more active markets is clear. Looking more 

closely at ‘market conditions’, we have further activity measures to consider. Volume 

behind oil futures swelled over the previous few years despite the struggle of the 

market’s value, but the subsequent rebound these past months was met with a 

reduction in turnover. In contrast, open interest (the total amount of trading 

exposure) behind crude hit a record as of the past session. From that exposure, 

speculative interest shows a heavy bias towards a long view. That said, traders in the 

futures market have maintained that view throughout the downdraft.