By Chris Tedder, Research Analyst, Forex.com
The RBA released its minutes from this month’s monetary policy meeting, at which the bank elected to cut the official cash rate to a record low of 2.75%, citing subdued consumer prices and growth. The minutes are broadly in line with market expectations of a slightly dovish policy stance, thus the Australian dollar didn’t immediately react heavily to their release.
Another cut in June is unlikely
The RBA is broadly mildly bullish on economic conditions in Australia’s trading partners. While China’s growth has been somewhat weaker than expected in recent quarters, the world’s second largest economy is still growing more than the 7.5% growth rate estimated by Beijing. At the same time, the US continues to grow at a modest pace and Japan’s stimulus measures are easing pressure on the Island nation through a weaker yen. Europe remains a point of concern, but the direct implications of lacklustre growth in the region currently have limited implications for the Australian economy.
The focus is on the domestic economy, and how it will fare in the face of decelerating mining investment and lacklustre growth in non-mining parts of the economy. However, a big hindrance to the Australian economy has been the strength of the Australian dollar. The recent decline in the value of AUD removes some impetus for the RBA to cut rates in the near-term. Also, the bank acknowledges that prior rate cuts have yet to fully find their way into the real economy. In fact, the bank stated that credit growth remains subdued, despite a strengthening housing market. Overall, the RBA appears content to remain on the side-line in the near-term, as its prior attempts at spurring consumption find their way into the real economy through the credit market. Hence, we don’t expect the bank to cut rates next month, which is in line with current market expectations (interbank pricing suggests the chance of a rate cut next month is below 20%, from above 30% prior to the Aussies recent sell-off).
There is, however, some key data out later this month which may influence the Australian dollar. Later this week Chinese private sector manufacturing PMI will be closely watched for any indication that sentiment in the heart of China’s economy is deteriorating. Next week, building approvals and, more importantly, CAPEX data will be closely watched for signs of underlying weakness in the Australian economy which, in turn, may cause the RBA to become more dovish.
AUDNZD broke back below 1.2000 overnight, which is a key psychological level for the pair. Fundamentally, we favour more weakness in the long-run on the back of a possible recovery in the NZ dollar. In the short-term, a push higher cannot be ruled out while price action remains above 1.1950. Above 1.2000, we are watching 1.2145 – February low – and then 1.2370 – 2012 low.