AUD/USD and NZD/USD Fundamental Daily Forecast – Traders Bet on Rate Cut While RBA Puts Faith in Strong Labor Market

Sellers are pounding the Australian Dollar on Tuesday after the Reserve Bank of Australia’s monetary policy statement and comments from RBA Governor Philip Lowe failed to convince traders that a rate cut wasn’t forthcoming later in the year. The RBA kept its benchmark cash rate unchanged at 1.5% where it has been since August 2016. Policymakers also maintained a neutral bias on policy, while implying it’s not considering a change in the near-term. However, several since of weakness including slow growth and low inflation offset solid labor market conditions, giving traders plenty of reasons to believe lower cash rates may be warranted in the future.

At 07:03 GMT, the AUD/USD is trading .7073, down 0.0040 or -0.57%.

There was no major news out of New Zealand, but its currency is also plunging in sympathy with the Australian Dollar. Last week, the Reserve Bank of New Zealand signaled that its major policy change would likely be a rate cut. Traders are already pricing in such a move for August 2019.

At 7:03 GMT, the NZD/USD is trading .6778, down 0.0027 or -0.40%.

Highlights of the RBA Monetary Policy Statement

“The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time,” the RBA statement read.

RBA policymakers also commented on the housing markets and inflation levels, saying, “The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low. Credit conditions for some borrowers have tightened a little further over the past year or so.”

“Inflation remains low and stable. Underlying inflation is expected to pick up gradually over the next couple of years, although this has been taking a little longer than earlier expected. The central scenario is for underlying inflation to be 2 percent this year and 2.25 percent in 2020. In the near term, headline inflation is expected to decline because of lower petrol prices earlier in the year, while underlying inflation is expected to remain broadly stable.”

Finally, on the value of the Australian Dollar, “The Australian Dollar has remained within its narrow range of recent times. While the terms of trade have increased over the past couple of years, they are expected to decline over time.”

Post-Decision Statement

After the release of the interest rate decision and monetary policy statement, RBA governor Philip Lowe emphasized the strength of the labor market and pick-up in wages as a “welcome development”.

“Continued improvement in the labor market is expected to see some further lift in wages growth over time, although this is still expected to be a gradual process,” Dr. Lowe said.

As far as economic growth is concerned, Lowe conceded GDP data painted “a softer picture of the economy than do the labor market data”.

“Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets,” he said.

“The drought in parts of the country has also affected farm output.”

“Offsetting these factors, higher levels of spending on publish infrastructure at an upswing in private investment are supporting the growth outlook, as is the steady growth in employment.”

Daily Forecast

The price action in the AUD/USD indicates that traders have painted the RBA monetary policy statement as dovish. The RBA continues to put faith in the labor market to help gradually lift wage and inflationary pressures in the years ahead. Until that changes, the RBA is likely to keep policy settings unchanged. However, based on recent commentary and economic data, it may not take much evidence of a softening in the labor market to convince policymakers to signal the need for cuts and this is what investors are betting on.