More Aus Dollar Weakness Ahead as ANZ and Barclays Forecast Another RBA Rate Cut

Above: Governor Stevens could cut rates again in either March or May.

“We continue to expect another 25bp cut at the March meeting given the Bank’s historical tendency towards consecutive moves in the early part of a new cycle.” - Felicity Emmett at ANZ Bank.

The Reserve Bank of Australia (RBA) released their much-anticipated minutes from the February meeting today.

There was little indication on future policy for currency markets to grab hold off, but a number of leading analysts have come out and warned another interest rate cut is due in coming months.

Like the SoMP and Stevens’ testimony last week, the minutes highlight that the main reasoning behind the downgrade of the growth forecasts and the consequent cut in the cash rate was the absence of signs of recovery in either business or consumer spending. 

Furthermore, there was the observation that the Australian dollar remains too richly priced on global exchange rate markets.

A lower interest rate would achieve a lower exchange rate, thus further aiding the Australian economy.

At the time of writing we see the pound to Australian dollar exchange rate (GBP/AUD) trading at 1.9061. UK high street bank transfer rates are seen in the region of 1.8833 while the most competitive independent dealers are delivering GBP/AUD at around 1.9464. Check latest rates here.

More Australian Interest Rate Cuts to Come

Past experience has been that the RBA often cuts rates in quick succession, and this has markets geared for another cut in coming months.

So when will the next move at the RBA be made?

“In past episodes, the RBA was quickly trying to turn from tight policy to easy policy, whereas the starting point for the February rate cut was an already record low cash rate. Consequently, we still expect the next rate cut in May, although we acknowledge the risk that the RBA moves sooner,” says Kieran Davies at Barclays.

Analyst Felicity Emmett at ANZ Bank is meanwhile of the opinion that the RBA will stick to past form and announce another cut at the next meeting:

“We continue to expect another 25bp cut at the March meeting given the Bank’s historical tendency towards consecutive moves in the early part of a new cycle and its own research which suggests that the impact of one 25bp rate cut on the economy is negligible.”

Lower Exchange Rate Forecast

Lower interest rates translate into lower exchange rates, and as a result Barclays are forecasting further weakness in the Australian dollar.

Governor Stevens and his board thought that the exchange rate was still overvalued and noted that “future exchange rate movements would be affected by market expectations for monetary policy, both domestically and abroad”,

Davies tells us he is forecasting another major leg lower in the AUD:

“Our version of the RBA’s fair value model suggests that the real exchange rate is now close to fair value, although history shows that the currency regularly overshoots.

“The board thought a ‘a lower exchange rate was likely to be needed to achieve balanced growth in the economy’, and we see sustained relief on that front with our FX strategy team forecasting the currency to fall to 75 US cents this year.”