Is AUD/USD Headed To Parity Post RBA Rate Cut?

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Market Drivers for May 7, 2013
RBA Cuts rates by 25bp citing below trend growth
French IP falls
Europe 0.29% Nikkei 3.55%
Oil $95/bbl
Gold $1459/oz

Europe and Asia:
EUR French IP –0.9% vs. -0.2%
EUR GE Factory Orders n/a

North America:
USD IBD Economic Optimism 10:00

The RBA lowered it benchmark rate to a record low at today’s meeting driving AUD/USD below the 1.0200 level in what was otherwise a very uneventful session in the currency market. The RBA cut the interest rate another 25bp to 2.75% citing slowing growth in the global economy and leaving open the possibility that the central bank may lower rates further before the year end.

In the statement by RBA Governor Glenn Stevens the RBA noted that, “Growth in Australia was close to trend in 2012 overall, but was a bit below trend in the second half of the year, and this appears to have continued into 2013. Employment has continued to grow but more slowly than the labour force, so that the rate of unemployment has increased a little, though it remains relatively low.

With the peak in the level of resources sector investment likely to occur this year, there is scope for other areas of demand to grow more strongly over the next couple of years. There has been a strengthening in consumption and a modest firming in dwelling investment, and prospects are for some increase in business investment outside the resources sector over the next year. Exports of raw materials are increasing as increased capacity comes on stream. These developments, some of which have been assisted by the reductions in interest rates that began 18 months ago, will all be helpful in sustaining growth.”

Governor Stevens made particular mention of the exchange rate, stating that it,”has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time. Moreover, the demand for credit remains, at this point, relatively subdued.” This was a clear signal by the central bank that it views the AUD/USD as too high at current rates and would like to see the pair trade lower – at least below parity – in order to rebalance the economy and stimulate the export sector.

To drive its point home the RBA stated that. “The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today’s meeting the Board decided to use some of that scope.” The emphasis on some suggests that the RBA is not finished easing just yet and given the absence of any price pressures in the Australian economy, would not hesitate to cut rates to 2.5% before the year end.

The Aussie initially tumbled on the news dropping below the 1.0200 level but then found some support from reported Asian Central Bank buyers who were bargain hunting the pair. However as the day progresses the downward pressure on Aussie is likely to increase as markets fully digest today’s message from the RBA. With global growth clearly slowing, especially in its key export market of China, the RBA is now seriously focused on lowering the exchange rate for the pair. For now the AUD/USD enjoys long term support at 1.0150 but if tonight’s AU report confirms the slowdown in economic activity the pair could very quickly fall towards the key parity level as the week progresses.

Boris Schlossberg
Managing Director

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