Australian Dollar Forecast to Find Support if RBA Defers Rate Cut this Week

- Expectations for 'mini' rate cut at RBA grow
- Economists say Oct. too soon to deliver cut
- "AUD can lift further if the RBA does not deliver a cut" - CBA

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The Reserve Bank of Australia's October policy meeting will be the Australian Dollar's highest hurdle to overcome this week, with markets expecting another interest rate cut of 0.10% aimed at offering the economy further support.

However, some economists are saying expectations for a rate cut at the October meeting are misplaced and a November cut is more likely, therefore the Australian Dollar could rise if market expectations are confounded.

"The RBA is expected to deliver further easing on Tuesday in the guise of a micro-cut of 10bp to the three year target rate. We are less convinced, and think that it will more likely wait until after the budget is delivered," says Daniel Been, Head of G3 & FX Research at ANZ Bank.

A rule of thumb in foreign exchange markets is that when a central bank signals it intends to cut interest rates, the currency it issue falls in value. It is therefore often the case that when the actual rate cut does come around, the move in the currency has already transpired.

Market expectations for a 'mini' rate cut at the RBA grew through September, a month in which the Australian Dollar broadly underperformed. Driving the expectation for a rate cut was RBA Deputy Governor Debelle who said on September 22 that a lower AUD exchange rate would "definitely be beneficial for the Australian economy".

Debelle touched on a number of options available to the Bank to achieve a lower Aussie Dollar and more supportive monetary conditions in the economy.

"With the move largely priced in, we struggle to see how the RBA can deliver anything that can push the AUD lower, and we see risks tilted the other way. This will be exacerbated by the delivery of the federal budget. A substantial deficit is expected, with further spending and tax cuts on the agenda," says Been.

The decision will be delivered at 04:30 BST.

"AUD upside is being capped by the expectations for a RBA interest rate cut. Our house view is that the RBA will leave monetary policy on hold at its meeting next week. AUD can lift further if the RBA does not deliver a cut," says Carol Kong, a foreign exchange strategist at Commonwealth Bank of Australia.

Ahead of the RBA decision, the Pound-to-Australian Dollar exchange rate is quoted at 1.8043, the Euro-to-Australian Dollar exchange rate at 1.6359 and the Australian Dollar-U.S. Dollar exchange rate is at 0.7177.

Expectations for a rate cut will have been tempered by last week's better-than-expected jobs vacancy data. Aiding the Aussie Dollar higher on October 01 was domestic job vacancies gained 59.4% quarter-on-quarter in August, meaning 78% of the previous quarter’s job vacancy losses have recovered.

According to the ABS, vacancies rose across all states and territories, with New South Wales recording a 56% rise, Victoria 59.5%, Queensland 67.0%, South Australia 83.2%, Western Australia 91.4% and the Northern Territory recording a 147% increase.

In the Northern Territory, Western Australia, Queensland and South Australia vacancies were reportedly higher than before the covid-19 pandemic.

Nevertheless, a consensus view amongst the analyst community is that a further interest rate cut might still be forthcoming as the RBA does not necessarily want to be seen as an outlier. With its peers in other major developed economies cutting interest rates the RBA risks creating headwinds for the economy if it holds superior interest rates, which can tend to lead to higher lending rates in the economy and a higher exchange rate.

"What is clear is that in G10 in particular, no central bank would like a stronger currency and all are keen to restate that policy will stay very accommodative for a very long time. This morning, we've heard from Guy Debelle, Deputy-Governor of the RBA, who stressed downside economic risks even as it appears (to me, anyway) that Australia's economic prospects from here are better than many others'," says Kit Juckes, Head of Global FX Strategy at Société Générale.

"The RBA will likely follow the RBNZ in delaying further monetary stimulus until later this year, probably at its next meeting in November, and this steady outcome will likely be neutral for the AUD," says Roberto Mialich, FX Strategist at UniCredit.