The RBA Doesn't Control Australia's Economy – China Does

Today is a critical juncture as the Reserve Bank of Australia (RBA) must decide between maintaining a facade of uncertainty or candidly addressing the economic realities before them. Take, for instance, the recent inflation figures: while the market anticipated 3.4%, the actual rate came in at 3.6%. I anticipate the RBA will need to provide substantive commentary on this unexpected inflationary pressure, rather than resorting to vague statements like "we are not ruling anything in or out," which essentially convey a lack of insight.

Inflation Expectation 

Source: TradingEconomicsIt's important to acknowledge that inflation has indeed moderated from 7.8% to its current 3.6% level as of the latest release on April 24, 2024. While some efforts have been made, there's room for improvement, particularly in reducing the balance sheets for central bank loans and managing the money supply. RBA's own data illustrates significant disparities in credit growth across sectors, notably a decline in business credit compared to robust personal credit expansion. This suggests that while individuals continue to spend on credit, many lack sufficient liquid savings, living paycheck to paycheck. Consequently, there's a risk that monetary policy constraints could erode these savings, exacerbated by interest rates failing to keep pace with inflation.

Australia Inflation 

Source: TradingEconomicsMoving forward, I anticipate a cautious stance from the RBA, albeit with a positive response regarding the Australian dollar, mirroring recent meetings. This dynamic partly stems from the close correlation observed between the HK50 (Hong Kong Index) and the Australian dollar, alongside the inverse relationship between the US dollar's strength and the Aussie's weakness. Additionally, the resurgence of the HK50, driven by China's property tax reductions, has bolstered the Australian dollar. Given these factors, it's unlikely that the RBA will make significant policy shifts today, especially considering market expectations of the first rate cut not materializing until September 2025.

AUDUSD x HK50 

 Source: TradingViewMy personal outlook remains bullish on the AUDUSD pair, with a long-term target of 0.67. However, it's important to recognize that this view reflects my own analysis and opinions.

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