Aussie Tumbles as RBA Cuts Rates

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The RBA lowered its benchmark by another 25bp citing downside risks to the global environment and sending AUD/USD tumbling through the 1.0300 level in the process. The market had priced in an 80% possibility of a rate cut, but the news nevertheless had an instantly negative impact on the currency pair as traders zeroed in on RBA decidedly more cautious tone.

The RBA noted that, “Economic activity in Europe is contracting, while growth in the United States remains modest. Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.”

The slowdown in global demand has yet to seriously impact the Australian economy, which the RBA observed, is “running close to trend, led by very large increases in capital spending in the resources sector.” However, the Australian monetary authorities are clearly worried that growth may begin to slow materially into the year end as troubles in Europe and Asia persist.

Furthermore the RBA was unconcerned with inflation noting that, “Inflation has been low, with underlying measures near 2 per cent over the year to June, and headline CPI inflation lower than that.” The lack of any pricing pressures in the system has clearly allowed the RBA to assume a more accommodative stance on monetary policy as authorities attempt to be more proactive in anticipating the possible slowdown in demand.

Overall, today’s RBA statement clearly shows that policymakers are no longer neutral in their assessment of risks to the Australian economy and could move to lower rates further should conditions deteriorate into the year end. One key factor that may have particular effect on RBA’s decision to cut rates is the ongoing strength of the Australian dollar. With export demand softening the RBA members may have been concerned about the negative impact of a strong Aussie on trade. Therefore, given the lack of any upside risks, the monetary authorities in Sydney may not be averse to further cuts in the interest rate before the year end as they try to guide the AUD/USD towards parity in order to promote more trade.

Boris Schlossberg
Managing Director

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