It has been a particularly volatile week for the Australian dollar as it’s broadly deteriorates alongside key Australian commodity prices. Thin market conditions and uncertainty about what the Reserve Bank of Australia will do at its policy meeting next Tuesday are playing havoc with aussie. In fact, AUDUSD has been jumping all over the place this week and price action is looking somewhat confused.
According to the OIS market there is an almost 80% chance that the RBA will lob 25 basis points of the OCR next Tuesday, which is incredibly high and the most dovish the market has been on an RBA policy meeting in a long time. However, economists aren’t as convinced that the RBA will loosen monetary policy this month. According to a fresh Bloomberg survey, only 10 of the 26 economists surveyed expect the RBA to cut the official cash rate to a record low 2.00% at next week’s meeting. This gap between the expectations of the market and economists isn’t anything new, but it highlights how strong the arguments are for both a rate cut and remaining on hold.
Why Stevens should ease policy further
The RBA should lower the official cash rate further because the economy is clearly struggling and further policy loosening would likely result in a weaker Australian dollar which ,all else being equal, would further alleviate pressure on trade exposed sectors of the country. Hope that non-resource parts of the economy will pick up the slack being left behind by diminishing mining investment is quickly fading. Investment coming from outside of the mining sector isn’t nearly enough and it’s clear that businesses aren’t very optimistic, thus we can’t see a meaningful pick up in investment in the near-term.
Australian economic data highlights how precarious the situation is downunder. Since the bank last met most economic data have underwhelmed market expectations, including the all-important Q4 GDP numbers (the Australian economy grew at just 0.5% in Q4, missing a consensus estimate of 0.6% q/q) and February’s misleading jobs report (the headline figures were good but these were overshadowed by a big drop in the labour force participation rate). Given these negative developments and the fact that the RBA’s language already suggests that it’s looking at cutting the cash rate this month, it seems likely that the bank will cut sooner rather than later.
A part of one sector of the Australian economy has the potential to keep the RBA on hold
There’s only one main reason why the RBA shouldn’t loosen monetary policy further, that is the performance of the residential and, to a lesser extent, commercial property prices in certain parts of the country. Of particular concern are the housing markets in Sydney and Melbourne where prices continue to skyrocket. If the RBA were to loosen monetary policy further it has the potential to add fuel to an already dangerously hot property market.
Clearly there’s a significant amount of risk when it comes to lowering interest rates further, but the risk is localised and contained in Australia’s two largest cities. Even so, is the reward worth the risk? There’s no doubt that the broader economy needs support from both the fiscal and monetary sides of the policy equation. Yet, the RBA has admitted that the flow-on effects of looser monetary policy are significantly diminished at this end of the interest rate spectrum. In saying that, the bank cannot stand idly by while Australia’s economic outlook deteriorates further. What's more, the RBA still has the option of using macro-prudential tools in an attempt to cool property prices.
A large proportion of the market is banking on the RBA cutting the OCR next week, which means the biggest risk for the AUD appears to be to the upside if the bank elects not to cut. In fact, it may change the currency’s short-term trajectory, assuming commodity prices flatten out. On the downside, we are keeping an eye on the pair’s almost six-year low around 0.7560. If the bank elects to cut the cash rate and maintains its dovish tone then this support zone may crumble and attention will shift to another support zone around 0.7450.
Follow us on Telegram
Stay updated of all the news
AUD/USD tumbles to breach 0.6500 as poor China's PMI offsets upbeat Aussie data
AUD/USD is seeing intense selling pressure and breaches 0.6500 after the Chinese NBS Manufacturing PMI sank further into contraction in May. Investors shrugged off hot Australian inflation data and strong Construction Work figures amid resurfacing China economic worries.
EUR/USD battles 1.0700 as China worries lift the US Dollar
EUR/USD is testing 1.0700, retreating from near the 1.0740 region in Wednesday's Asian trading. Dismal China's NBS Manufacturing PMI and pre-US debt deal vote anxiety reinstate the US Dollar's safe-haven appeal. US/ German data, Fedspeak and House vote in focus.
Gold: Bear Cross confirmation to threaten 100 DMA support again Premium
Gold price is fading the previous rebound above the $1,950 mark, as the United States Dollar (USD) is seeing a fresh uptick amid a risk-on market profile. Attention now turns toward the House of Representatives vote on the US debt deal.
New SHIB investors bring deposits to the network but fail to trigger a rise in Shiba Inu price
Shiba Inu price is still facing consolidation after nearly a month of no major gains, and it seems like this might be the case for a while. Even though the network is observing bullish interest from new investors, the lack of bullishness from existing SHIB holders might act as a barrier to recovery.
Debt ceiling deal keeps dollar locked in devaluation spiral
Fiscal hawks weren't optimistic when Kevin McCarthy was elected Speaker of the U.S. House. The California Republican's track record was dismal when it comes to spending restraint. Nearly 5 months into his term, it is now apparent McCarthy has no intention of holding the line against government expansion.