Australian Dollar Outlook Softens as R.B.A Lays the Ground for Interest Rate Cuts

The Reserve Bank of Australia (RBA) left the cash rate unchanged at 2% at its board meeting today; no surprises here as markets were expecting no change.

However, the post-meeting statement was slightly more dovish than currency markets had expected, although the initial market reaction suggests the market was looking for something more downbeat.

“Overall, the statement suggests to us that the Bank sees a number of emerging risks on the horizon, and it remains ready to cut rates if necessary,” says Felicity Emmett at ANZ Research.

The reaction by the Aussie dollar has been negative:

The pound to Australian dollar exchange rate has edged further up to reach 2.0336, bank transfers are still being offered at under 2.0 though. However, independents are seen offering above 2.0.

The euro to Australian dollar exchange rate is seen at 1.5422 on the open markets, higher than Monday’s close at 1.5329. Bank rates are seen above 1.48 but below 1.50 while independent transfer specialists are offering above 1.53.

The US dollar to Australian dollar exchange rate is at 1.4141, higher than Monday’s close at 1.4070. The best transfer rates available on the open market are seen just above 1.40.

No Cut in 2016 say St. George

The RBA is permanently engaged in a balancing act, providing support or restraint when needed.

Striking a more positive tone on the Australian dollar via the interest rate debate is Hans Kunnen, Chief Economist at St. George Bank.

“As we approach 25 years of continuous economic growth, we expect the RBA will assist in achieving that goal by providing both stability and support via its current accommodative cash rate of 2.00% throughout 2016,” says Kunnen.

Despite heightened volatility in financial markets, the RBA noted that the global economy is continuing to grow. But it does acknowledge that risks exist and that outcomes remain uncertain.

The RBA will release its Statement on Monetary Policy on Friday. That may provide details of any downgrade in its outlook for global growth.

Pound to Australian Dollar Forecast

The Pound Aussie rate has renewed its down-trend within a descending channel in the midst of a longer-term up-trend.  

It is now close to a support low at 2.0180, where it could base and find support.

After that there is even more support at around the 2.0000 level as well as round-number psychological support.

Although the short-term trend is down and normally expected to extend further, the triple convergence between MACD and price is a bullish indication and warns of a potential resumption of upside.

Indeed, the convergence with OBV is a further sign indicating underlying strength and a possible reversal on the horizon.

Furthermore, the price action seems to be churning slowly and the old saying “never short a dull market” may on this occasion be true.

However, neither are there any signs of strength yet, but a move above 2.0325 would go some way to signalling the start of a reversal and rebound, with an initial target at 2.0532, as ultimately this market may be in transmission.

Australian to US Dollar Forecast

The Aussie has recovered on the back of stronger oil prices and impressive domestic data, however, it has so from a record low.

The small rebound has now almost reached the 50-day MA at 0.7145 where it is expected to meet staunch resistance - then above that we have the 0.7169 resistance level from the trend-line for the recent corrective pattern higher, therefore upside is naturally capped.

The current move higher also appears to have traced out a sketchy a-b-c pattern and, that, as well as the resistance levels may indicate that it is in peril of running out of steam.

Given the strong dominant long-term down-trend it should not come as a surprise to traders if the down-trend resumed pushing the pair down to the 0.6827 lows.

A break below those key levels would confirm a continuation down to 0.6760 initially (the 100% extrapolation of the height of the previous consolidation). 0.6760

A subsequent move 20 points below the 0.6760 level – so below 0.6740 handle, would probably see a continuation to the S3 Monthly Pivot at 0.6670.