Watching the AUD and housing market

The RBA Observer: On hold, watching the AUD and housing market

- The RBA is likely to continue to be concerned about the high AUD, particularly given it has rallied in the past month

- But, at the same time, local sentiment has bounced following the election, local housing prices are rising solidly and growth in China is lifting

- We expect the RBA to hold steady, as worries about the high currency, which could have motivated a cut, are traded off against risks of overinflating the housing market

AUD still a focus, but housing market important too

The high level of the AUD will no doubt still worry the RBA. Even when the AUD was at US90 cents, as at the last Board meeting, the RBA had noted that they hoped it would fall further – not rise. Since then it has appreciated and is now trading around US94 cents.

But there is an important caveat to keep in mind. While a lower currency would be preferred, the recent AUD appreciation does appear to be mostly for the right reasons. While the AUD has been lifted by the Federal Reserve’s tapering stand-off, the bigger driver in the past month is still arguably better economic conditions in Asia. Chinese growth is lifting and commodity prices are rising. With that in mind, the RBA may be more comfortable with the AUD rise than they were when commodity prices were falling and the AUD remained stubbornly high – as was the case earlier this year and in 2012.

There are also some signs that local conditions are improving. Consumer and business sentiment indicators both jumped in the past month, with the change of government likely to have been a factor. Consumer sentiment bounced to its highest level since December 2010, lifted by sentiment amongst Coalition party voters. Business confidence rose in August, ahead of the election, partly driven by the expectation of a change of government.

The RBA also has another growing concern. Housing prices are now rising quite solidly, as low interest rates get traction. While this is part of the plan to rebalance growth, as mining investment slows down, the RBA would not want to see housing prices or new lending rise too rapidly. This week the RBA released its semi-annual financial stability review which noted that it is important that ‘banks maintain prudent risk appetite and lending practices, especially in the current low interest rate environment’. This suggests some nervousness about the potential risks of over-inflating the housing market.

We expect the RBA to be on hold next week and in coming months.

ends

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