The Reserve Bank of Australia (RBA) left the official cash rate at 2.25% at its monetary policy meeting today, stating that the Australian dollar has declined noticeably against the US dollar and a lower exchange rate is likely needed to achieve balanced growth in the economy. Ironically, this sent the Australian dollar soaring past a resistance zone around 0.7700 against the US dollar, with the market pricing in around a 70% chance of a rate cut prior to the bank’s decision.
The RBA noted that it was appropriate to leave rates unchanged at present, but further easing may be needed over the period ahead. This means that the RBA firmly retains its dovish stance and we still think it will cut the official cash rate soon. The Australian economy is clearly suffering and this has been exasperated lately but a further decline in key commodity prices.
One of the biggest risks of lower interest rates is the potential of looser monetary policy to spur demand in Sydney’s already overheated property market. Stevens stated that the bank is working with a number of regulators to assess and contain risks that may arise from the housing market. The threat of a property bubble in Sydney and growing business lending, combined with the fact that there haven’t been any major downside surprises to growth since the bank last met are likely the mains factors keeping the RBA on the sideline.
What does this mean for the aussie?
The decision to hold fire today has given the Australian dollar another lease on life, at least for the time being. It’s hard to get too bullish on the aussie given the fundamental weaknesses weighing heavily on the commodity currency, but we cannot rule out a short-term rally as the market digests the RBA’s decision not to tamper with interest rates. AUD is still attractive from a yield perspective, especially given Australia’s AAA status.
In the long-term, our bias remains mildly lower on the back of predicted monetary policy loosening due to an undeniably soft Australian economy. This view is complicated by the notion that the Fed is moving away from raising interest rates in June due to last Friday’s soft jobs report (while one employment number isn’t going to dictate policy, a further deterioration of the labour market would derail any plans for a near-term rate hikes). If the Fed is less hawkish than currently expected, it would likely lead to widespread USD sell-off, which threatens our bearish AUDUSD view. However, the stronger AUDUSD gets the more motivation the RBA has to cut interest rates.Publication source