RBA Prepares to Cut but for AUD, Guidance is Key

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RBA Prepares to Cut but for AUD, Guidance is Key

Daily FX Market Roundup June 3, 2019

This is a big week for the Australian dollar. The calendar is full market moving events such as retail sales, PMIs, the trade balance and first quarter GDP. All of these reports are important but the biggest driver of Australian dollar flows will be tonight’s Reserve Bank of Australia monetary policy announcement. The RBA is widely expected to lower interest rates to a record low of 1.25% and follow with another round of easing in July or August. The market is pricing in a 93% chance of an interest rate cut and the only question is how eager they will be to move again. Sino-US relations have deteriorated rapidly but domestic data hasn’t been terrible.

Taking a look at the table below, consumer spending, inflation, business confidence and housing activity weakened since the last policy meeting but job growth, consumer confidence and manufacturing activity strengthened.
Although Chinese data also improved, investors are skeptical of anything but softer reports from China.

Unfortunately domestic strength won’t shield Australia from weaker global growth and lower demand from China. Back in May when the domestic economy was faring ok as well, the Reserve Bank had nothing positive to say about its outlook. The only reason why they held off easing at the time was because they wanted to see if the US and China could reach a trade deal. Unfortunately that never happened and instead over the past month, trade tensions between the world’s 2 largest economies intensified. There’s no doubt that Australia will be a casualty of the Sino-US trade war so the RBA will have no choice but to ease if they want to avoid a recession.

As for how the Australian dollar could respond, guidance is key. If the RBA lowers interest rates and appears uncommitted to additional easing, the deeply oversold AUD/USD could squeeze up a percent and head even higher on short covering. All they have to say is future moves are data dependent. If they cut rates and talk of more easing but also highlight the areas of strength / resilience in Australia’s economy, we could a modest decline in A$. However if they lower interest rates and signals that this move marks the beginning of a more aggressive easing cycle, we could see a deeper slide in AUD/USD that could take the pair towards 67 cents.

Kathy Lien
Managing Director

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