Australian Dollar Outlook Clouded by Potential May Rate Cut
The Aussie dollar exchange rate complex (AUD) has powered higher in the wake of the latest monetary policy decision at the RBA.
The Reserve Bank of Australia (RBA) left the cash rate unchanged at 2.25% but still left the prospect of another interest rate cut alive.
The RBA noted business lending has picked up as a reason for keep rates unchanged.
Interestingly for the exchange rate the Bank removed reference to the AUD being fundamentally expensive.
The AUD bounced sharply higher vs the USD, GBP, CAD and other major crosses.
We warned in a previous report that this scenario was highly likely owing to a growing over-confidence that a rate cut would be delivered.
Markets are now expecting easing to be announced in May but some analysts we have spoken to have said they are losing conviction that any extra interest rate cut will come at all.
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Many have cited the use of the phrase the "Board will assess the case for such action at forthcoming meetings” as justification.
It would appear the RBA still looks for the terms of trade shock from lower commodity prices to weigh on the currency.
The strong state of the consumer also provided the RBA with some reason to keep rates stationary as Retail Sales increased to 0.7% versus 0.4% eyed.
“The Aussie which has been selling off for more than a week in anticipation of a possible rate cut popped towards .7700 while AUD/NZD pulled away from parity to 1.0200 which must have been a relief to both RBA and RBNZ and may have been part of the reason the central bank remained neutral this month,” says Boris Schlossberg of BK Asset Management.
The team at the Reserve Bank of New Zealand RBNZ will be particularly pleased that the race to parity in AUD/NZD appears to have taken a breather.
Outlook Sees Further AUD Weakness
Despite the recovery seen in the Aussie dollar complex, we remain wary of further declines.
“In the midterm look for further depreciation in the AUDUSD to retest 0.7580 then 0.7533 support,” says Peter .
with commodity prices remaining low (only somewhat offset by weaker AUD) and macro prudent measures somewhat controlling the white hot Australian housing markets failing to cool activity, a rate cut to 2.00% will come in May.
The pound sterling does still look bullish against the Australian dollar at this stage and his half-way through the next leg up in its broader uptrend cycle.
We would expect a test of 2.0 GBP-AUD and higher to be the outcome.
That said, with the UK moving into a period of political uncertainty making a solid call on the GBP remains difficult.
We would not move on sterling until a stable outcome to the 7th May election is known.
Additionally, the one-way approach to selling the Aussie is also less assured simply based on our observation that there may not be another interest rate cut in 2015.
If this is the case then the worst could well be behind the currency.
