Reaction to the Reserve Bank of Australia’s (RBA) December meeting minutes proved largely positive, keeping the Australian Dollar on a stronger footing against its rivals.
The RBA’s increasingly confident tone on the domestic economic outlook encouraged markets, even though there were still some signs of caution amongst policymakers.
A weakening in consumer spending and confidence was highlighted as a key risk to the outlook, something which could further drag on inflationary pressure.
As Bill Evans, research analyst at Westpac, noted:
‘The source of concern remains the consumer. The meeting occurred the day before the release of the September quarter national accounts which showed that consumer spending growth slowed to the weakest we have seen since the December quarter 2008. The minutes report that “household consumption continued to be a significant risk, given that household incomes were growing slowly and debt levels were high”. This is a more concerning description of the outlook compared to November which used the term “uncertain”.’
Even so, as the Roy Morgan weekly consumer confidence index showed a modest improvement this limited any negative impact of the minutes, keeping the Australian Dollar US Dollar exchange rate on an uptrend.
However, if the Westpac leading index for November proves disappointing this could see the ‘Aussie’ soften once again on Wednesday.
US Dollar Struggles to Capitalise on Tax Reform Anticipation
While investors widely expect the House of Representatives to pass the Trump administration’s heavily-anticipated tax reform bill imminently the US Dollar has struggled to gain much traction.
There are still concerns over the likely impact of the reforms, with markets still showing some reluctance to overreact to the delivery of this long-awaited campaign pledge.
A greater sense of risk appetite also kept the ‘Greenback’ under some degree of pressure, losing out to its higher-yielding rivals during Tuesday’s European session.
The AUD USD exchange rate could extend its gains further overnight if November’s US housing starts and building permits figures fail to impress.
Forecasts point towards a contraction in both measures on the month, reflecting a loss of momentum within the domestic housing market.
Even though this is unlikely to have a material impact on the odds of the Federal Reserve pursuing further monetary tightening in the coming year a weak showing here could still weigh heavily on the US Dollar.
On the other hand, an upside surprise could offer some support to USD exchange rates, particularly if markets react further to the passage of the tax reform bill.
Current AUD USD Interbank Exchange Rates
At the time of writing, the Australian Dollar US Dollar exchange rate was trending higher around 0.7674. Meanwhile, the US Dollar Australian Dollar exchange rate on a downtrend in the region of 1.3026.