James Hyerczyk
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The Australian Dollar finished lower last week, but far enough from its low of the week to suggest that investors have already moved on from last week’s news and are already preparing for the Reserve Bank of Australia’s (RBA) next meeting on September 3. The three main events last week were the RBA interest rate decision, a speech by RBA Governor Philip Lowe and the release of the RBA Monetary Policy Statement.

Last week, the AUD/USD settled at .6787, down 0.0013 or -0.20%.

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RBA Keeps Cash Rate Unchanged

At its August 6 monetary policy meeting, the RBA kept the cash rate unchanged at an all-time low of 1.00%. The decision was in line with trader expectations, and followed two consecutive cuts in June and July. Nevertheless, the RBA’s dovish tone in its accompanying comments signaled that further monetary policy easing is likely in the coming months.

In its accompanying statement, the RBA noted that growth in the first half of the year has been lower than had been expected, amid slumping housing prices and muted disposable income growth, ensuring the central bank’s tone remained largely dovish.

The RBA also downgraded its inflation expectations against the backdrop of subdued price pressures and sluggish growth. The central bank now expects the headline rate to fall short of the target range in 2020 and will only reach above 2% in 2021.

The RBA also highlighted uncertain domestic consumption dynamics, the weak housing market and the ongoing trade dispute between the United States and China as the key risks to the outlook. Due to these major issues, the central bank noted that “an extended period of low interest rates will be required in Australia” in order to reduce unemployment and bring inflation to within target range.


RBA Governor Lowe:  Sees ‘Gentle Turn’ in Economy

In a speech a couple of days after the RBA decision, Governor Lowe said he’s prepared to reduce Australia’s record low interest rates further if needed, though signaled the economy could be through the worst of its slowdown.

While the RBA was releasing forecasts calling for slower economic growth and inflation, and a lower unemployment rate, while hinting at the possibility of two more rate cuts that would bring the cash rate to 0.5%, Lowe was striking a note of quiet optimism.

“There are signs the economy may have reached a gentle turning point,” Lowe said in his opening statement to a parliamentary panel in Canberra Friday. “Consistent with this, we are expecting the quarterly GDP growth outcomes to strengthen gradually after a run of disappointing numbers.”

“While we might wish it were otherwise, it is difficult to escape the fact that if global interest rates are low, they are going to be low here in Australia too,” Lowe said in his semi-annual testimony. “Our floating exchange rate gives us the ability to set our own interest rates from a cyclical perspective, but it does not insulate us from long-lasting shifts in global interest rates driven by saving/investment decisions around the world.”

RBA Sees Further Economic Deterioration

In its monetary policy statement, the RBA revised down its forecast for 2019 from 2.75 percent to 2.50 percent. However, it retained its forecast for 2020 of 2.75 percent. For 2021, the RBA upgraded its growth forecast to 3.00 percent from 2.75 percent.

For underlying inflation, the RBA’s previous forecasts were 1.75 percent in 2019, 2.00 percent in 2020 and 2.00 percent for the year to June 2021. The RBA now expects inflation to be 1.50 percent in 2019, 1.75 percent in 2020 and then 2 percent in 2021.

In May, the unemployment rate was forecast to hold at 5.00 percent to December 2020 before falling to 4.75 percent by June 2021. The new forecasts have the unemployment rate at 5.25 percent in 2019 and again in 2020, then edging down to 5 percent in 2021.

Weekly Forecast

This week, AUD/USD investors will be focusing on Wednesday’s Wage Price Index, and Thursday’s Employment Change and Unemployment Rate.

The Wage Price Index is expected to come in at 0.5%. The Employment Change is expected to show the economy added 14.2K jobs in July. The Unemployment Rate is expected to have held steady at 5.2%.

Traders will also be watching for any fresh developments regarding U.S.-China relations especially surrounding the Chinese yuan and its relationship with the 7 yuan to 1 U.S. Dollar level. Any prolonged dips below this level could cause heightened volatility in the financial markets that could drive the Aussie lower.

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