Fundamental Australian Dollar Forecast: Bearish
- The RBA will meet to set policy this week
- Markets are less sure that a cut is coming than they were after last month’s weak inflation numbers
- This may mean exaggerated moves on the fact, whatever it its
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Could the Australian Dollar see an interest rate cut this week, the first move of any sort in interest rates since August 2016?
This is likely to pose a maddening problem for investors right up until they see the color of the Reserve Bank of Australia’s money on Tuesday. That’s when the central bank will make its May monetary policy decision.
Thanks largely to weak inflation data last month, interest rate futures markets still price in a quite-high chance of action. They put the chance of a quarter-point cut in the Official Cash Rate, to a new record-low of 1.25%, at about 44%.
That’s extremely high by the standards of any monthly meeting since rates moved last, back in August 2016. However, and this is the maddening part, it is also much lower than the 68-69% confidence in a cut which was priced in in the immediate aftermath of those feeble Consumer Price Index numbers at the end of April.
The upshot of this is likely to be a lot of hedged bets and an exaggerated move either way whatever happens on Tuesday.
However, the RBA will also give its monetary policy statement to the markets on Friday. Even if it opts not to cut rates this month, it is hard to see that statement being anything other than pretty dovish. After all, inflation is far from the only area of Australian economic weakness currently visible, as the latest building-approval figures amply demonstrated.
So, it’s cards on the table time.
I think, just, that the RBA will reduce Australian interest rates this week for fear of falling too far behind the curve on its inflation-targeting mandate. Even if it doesn’t, though, it will leave the door to a near-term reduction wide open when it discusses policy. With all that in mind, it just has to be another bearish call for AUD/USD which is already back within the downtrend channel which bounded most of last year’s trade.
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— Written by David Cottle, DailyFX Research
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