Sterling / Australian dollar: RBA wants to see the AUD shed even more blood

Today's RBA minutes stress the scope for further interest rate cuts, triggering further AUD weakness:

The pound to Australian dollar is 0.25 pct higher at 1.6514. These gains for GBP-AUD come even as sterling comes under pressure against the other major currencies following today's inflation data.

The Australian dollar to US dollar exchange rate is 0.95 pct down at 0.9454.

Note that the above are spot market quotes; your bank will add their own spread to these wholesale market numbers. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please find out more here.

RBA Minutes: Plenty of worrying phrases for the Australian dollar bulls

"Minutes from the Reserve Bank of Australia’s last monetary policy meeting showed the bank believes the currency remains high despite its recent sell-off. The Aussie was under pressure following the dovish minutes and edged closer to its 33-month low versus the greenback," says Emman Xuereb at RTFX.

"There were plenty of worrying phrases within the Reserve Bank of Australia’s meeting minutes. They alluded to a “benign” inflation outlook, which keeps the door open to further interest rate

cuts. It was stressed that investment in the mining sector is peaking, while the wider growth outlook was pretty downbeat," says Richard Driver at Caxton FX.

In the June Monetary Policy Decision the Bank said there may be scope to ease further, while today, synonymously, the Bank said the inflation outlook might provide scope for further easing.

"It appears this qualification reflects the Bank’s uncertainty over the potential course of the AUD noting that “It was possible that the exchange rate would depreciate further over time as the terms of trade declined, which would help to foster a rebalancing of growth in the economy”. This suggests that future rate decisions will also be influenced by AUD levels and movements," says Ivan Colhoun at ANZ Research.

For the record, the AUD fell from around USD1.03 to USD0.96/USD0.97 between the May and June meetings and has mostly traded between USD0.95 and USD0.97 since, slipping to USD0.95 after the minutes today.

The RBA has tweaked its easing bias

Kieran Davies at Barclays has the following observation regarding today's minutes:

"The RBA kept the cash rate unchanged in June at a record low of 2.75% and tempered its easing bias. The minutes showed that the RBA has tweaked its easing bias.

"In past minutes, the easing bias was stated as “the outlook for inflation, as currently assessed, would provide scope for further easing should that be necessary to support demand”.  

"Now, the bias is written as “the inflation outlook as currently assessed might provide some scope for further easing, should that be required” (italics added).  

"This mimicks the changes made in the June rate announcement, which we first thought were stylistic given that statement was much shorter than usual. However, it is consistent with subsequent indirect signalling via the press from the RBA that it has tempered its easing bias."

According to Davies, the RBA wants a lower AUD:

"The exchange rate had depreciated 'noticeably', but remained at a high level considering the decline in export prices over the past year and a half (documents released under freedom of information laws earlier this year indicated that the RBA had thought the exchange rate was 7% overvalued at that time, such that the subsequent large fall in the exchange rate would have significantly reduced the extent of overvaluation, even as the terms of trade resumed its decline).  The RBA thought that the exchange rate could fall further as the terms of trade fell, which would “help foster a rebalancing of growth in the economy”."

In addition, the RBA still thinks the peak in mining investment is near.  

"We see no change in rates at the July meeting, albeit with the RBA retaining an easing bias. The RBA meets on 2 July in Brisbane and should keep the cash rate at a record low of 2.75%, while retaining an easing bias given its concern about the exchange rate still being too high. The currency could change the RBA’s plans if it sharply rebounded, but at this stage indirect signaling via the media also indicates that the RBA is likely to stay on hold," says Davies.

The market is pricing a 22% chance of a 25bp rate cut, down from 55% earlier in June.  

Note that Governor Stevens is due to speak on the economy on 3 July, also in Brisbane, which would be the first major speech since April.