AUD/USD: RBA sees danger in high household debt
The head of Australia's central bank Philip Lowe gave the clearest signal yet on Wednesday that further cuts in interest rates would not be in the national interest as the danger of a debt-fuelled boom and bust was just too severe.
Lowe noted that high levels of debt combined with subdued wage growth were already making households wary of spending freely, a drag that was only set to get worse.
Data out on Wednesday showed annual pay rises were stuck at an all-time low of 1.9%, with ongoing weakness in private sector wages.
Lowe held out the hope that wage growth had finally bottomed, although the RBA's liaison with firms suggested an upturn was not imminent.
A high and rising unemployment rate might add to the case for more stimulus, Lowe said, yet the bank was satisfied that the labour market was heading in the right direction.
Lowe, who took over the reins at the RBA last September, has repeatedly stressed about the diminishing returns to the economy from lowering interest rates further, largely due to ballooning household indebtedness. The ratio of household debt to disposable income is at an all-time peak around 180%, while the saving rate has fallen. Mortgage debt stands at AUD 1.7 trillion, larger than the country's annual economic output.
"We have been seeking to balance the risks from having inflation low for a longer period against the risks from attempting to increase inflation more quickly, which would partly occur through encouraging more borrowing," said Lowe. While there was a danger that low inflation could lead to a self-fulfilling decline in inflation expectations, he did not see "a particularly high risk" of this in Australia. However, he did see danger in spurring more debt.
"At some point in the future, households having decided that they had borrowed too much, might cut back consumption sharply, hurting the overall economy and employment," he warned.
Technical analysis
A hawkish message from Philip Lowe supported the AUD. It is trying once again to break above the 0.7700 resistance against the USD. We think the AUD may succeed if today’s FOMC minutes are less hawkish than expected. The AUD/USD remains above the 14-day exponential moving average, which highlights the overall bullish structure.
Trading strategy
Our short-term and long-term positions are getting closer to the 0.7750 target. We think it may be reached even today in case of less hawkish FOMC minutes.
GrowthAces.com - Daily Forex Trading Strategies
The head of Australia's central bank Philip Lowe gave the clearest signal yet on Wednesday that further cuts in interest rates would not be in the national interest as the danger of a debt-fuelled boom and bust was just too severe.
Lowe noted that high levels of debt combined with subdued wage growth were already making households wary of spending freely, a drag that was only set to get worse.
Data out on Wednesday showed annual pay rises were stuck at an all-time low of 1.9%, with ongoing weakness in private sector wages.
Lowe held out the hope that wage growth had finally bottomed, although the RBA's liaison with firms suggested an upturn was not imminent.
A high and rising unemployment rate might add to the case for more stimulus, Lowe said, yet the bank was satisfied that the labour market was heading in the right direction.
Lowe, who took over the reins at the RBA last September, has repeatedly stressed about the diminishing returns to the economy from lowering interest rates further, largely due to ballooning household indebtedness. The ratio of household debt to disposable income is at an all-time peak around 180%, while the saving rate has fallen. Mortgage debt stands at AUD 1.7 trillion, larger than the country's annual economic output.
"We have been seeking to balance the risks from having inflation low for a longer period against the risks from attempting to increase inflation more quickly, which would partly occur through encouraging more borrowing," said Lowe. While there was a danger that low inflation could lead to a self-fulfilling decline in inflation expectations, he did not see "a particularly high risk" of this in Australia. However, he did see danger in spurring more debt.
"At some point in the future, households having decided that they had borrowed too much, might cut back consumption sharply, hurting the overall economy and employment," he warned.
Technical analysis
A hawkish message from Philip Lowe supported the AUD. It is trying once again to break above the 0.7700 resistance against the USD. We think the AUD may succeed if today’s FOMC minutes are less hawkish than expected. The AUD/USD remains above the 14-day exponential moving average, which highlights the overall bullish structure.
Trading strategy
Our short-term and long-term positions are getting closer to the 0.7750 target. We think it may be reached even today in case of less hawkish FOMC minutes.
GrowthAces.com - Daily Forex Trading Strategies
