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The RBA kept rates unchanged at 3%, in line with market expectations. Its broadly neutral statement provided support to the AUD. Although the RBA signalled that the bias for policy was skewed towards further rate cuts, the RBA said it would cut only “if needed”. The RBA’s view that economic conditions in China have “strengthened considerably” and that there was tentative evidence of the US economy approaching a turning point caught the market’s attention.

However, the RBA’s signal that inflation is abating (owing to sluggish output, lower capacity utilisation rates and weak demand for labour) is yet another indication that the market’s pricing of inflation expectations is overdone. The underlying signal from all major central banks has been that it is premature to talk about “exit strategies” when inflation poses no real threat in the medium term.
Hence, upcoming inflation data will be especially important and is likely to shift market sentiment.

Sell AUD/USD on rallies above the 0.80 handle.