Will the Reserve Bank of Australia (RBA) cut interest rates to a fresh record low of just 1.50%? At the central bank’s monetary policy decision tomorrow for August, the odds are in favor 2/3 for the central bank to do just that. In an era of low interest rates, this is still one of the highest rates among developed economies. Nonetheless, traders should expect the Aussie dollar to fall this week if the RBA does indeed cut rates, but they shouldn’t expect any capitulating drops as the odds as mentioned, are in favor of the cut.
If the RBA decides not to cut, then the Australian dollar will likely see a decent pop, however, this is not on the policy agenda of the financial policy makers in Australia. In the latest inflation data just released from Australia, rates keep coming in lower than expected. This gives fresh incentive for the RBA to jiggle policy a bit. Moreover, the latest data from China (which Australian exports are so reliant upon) showed the official manufacturing purchasing managers’ index (PMI), which tracks the health of large and state-owned enterprises, came in at 49.9 in July versus a Reuters poll that predicted a 50.0 reading, and compared to the 50.0 logged in June. However, in the the same data dump on a positive note, the Chinese services sector showed an uptick in activity, with July PMI coming in a 53.9 versus 53.7 in June.
The Australian Review had a fresh take where they believe cutting rates is not the answer for the Australian economy, it states, there is little prospect that cutting interest rates even further would stimulate any more economic activity – apart from inflating already overblown housing prices. The article further states:
The real case for even lower official interest rates is to try to prevent the Australia dollar rising as central banks in the UK and Japan prepare for further easing of credit conditions. If the US Federal Reserve rubs out a rate hike pencilled in for next month, the $A would likely strengthen, thus undermining the economy’s transition from its resource investment boom. But it is risky for the central bank of a price-taking economy such as Australia to try to target the exchange rate by taking part in the global currency wars.
According to Richard Grace, chief currency strategist at the Commonwealth Bank, the Aussie is likely to be buffeted by a series of domestic and international factors over the trading week.
“AUD/USD will this week be influenced by four major domestic factors this week, and end the week lower,” says Grace. “The four major domestic factors are the Australian international June trade figures (Tuesday), the RBA’s August board meeting (Tuesday), the Australian June retail trade numbers (Thursday) and the RBA’s Quarterly Statement on Monetary Policy (Friday).”
Westpac Bank, in its weekly Aussie currency forecast expect the Aussie to trade in a .7600 – .7400 range against the dollar. The pair has already floated down in the wake of Monday’s data, the .7400 handle could be a key support level to watch in the midst of the week.