Australian Dollar: RBA Cuts Forecast in 2016 by ANZ

The Reserve Bank of Australia (RBA) left interest rates unchanged at the October meeting but the central bank still presents downside risks to the Australian dollar's outlook as cuts in 2016 are likely.

The Aus dollar has caught a bid on Tuesday the 6th of October after the RBA left interest rates unchanged while global markets traded in positive fashion providing positive background noise for the currency.

The pound sterling to Australian dollar exchange rate (GBPAUD) remains under pressure with the pair down at 2.1318.

As the below graph confirms, the pair is now at risk of breaking into a new, lower, range as support levels break:

The GBP/AUD is still trading above the 20 day moving average though, currently located at 2.120. Until the exchange rate breaks below here we would be biased to say the sideways consolidation move is likely to continue.

If the 20 day MA is broken then the prospect of a more sustained downtrend becomes possible.

RBA to Cut Again in 2016 Forecast ANZ

Fundamentally, the outlook for the Australian currency will be determined by the central bank.

Not surprisingly, the RBA left rates unchanged at its monthly board meeting today. The post meeting press release was also little changed, with the October statement almost a carbon copy of the September one.

"In recent months, the RBA have toned down their dovish jawboning to avoid sending the AUD into free-fall," says Chris Turner at ING.

Such motives echo comments from Norway’s PM over the weekend that a rapid depreciation of a currency can cause a medium-term loss of liquidity and a structural increase in volatility, which hinders business investment.

Nevertheless, the prospects of an interest rate cut over the course of coming months remains alive with money markets pricing in a 40% chance that a rate cut will happen by next year.

ANZ Research, in a note out following the RBA decision, said they are factoring in a 2016 cut:

"It is then that the RBA will be prompted to cut rates to support growth, and we continue to expect 25bp rate cuts at the February and May meetings next year."

ANZ's Felicity Emmett says:

"Our own view is that this is likely to continue for a while, but next year’s growth could deteriorate as the boost from housing starts to fade, and the impact of the lower AUD on services trade lessens. With the loss of those two key supports, growth is likely to be insufficient to prevent the unemployment rate rising from an already elevated rate – something we think the RBA would feel particularly uncomfortable about."

The Australian currency has devalued and remains currently very low which has taken off some pressures on the country as it has boosted the exports.

Nonetheless, one of the major partner for commodities is China and the lingering weak commodity prices are weighing on the Australian growth.

In particular the mining industry is suffering and investments have declined sharply.

It seems that the positive effects of a weak currency are not offsetting the growth deceleration due to negative world market conditions which should keep the prospect of an AUD-negative rate cut alive.