AUD/USD and NZD/USD Fundamental Daily Forecast – RBA Indicates Rates On Hold For Long Time

The Australian Dollar firmed and the New Zealand Dollar traded flat. That was the extent of the Forex pairs’ reaction to the Reserve Bank of Australia’s interest rate decision and rate statement released earlier today.

This tells me that traders are more interested in what the Fed is going to do and how that will affect the U.S. Dollar, and that investors may be waiting for more details from the RBA when it releases its monetary policy statement on Friday.

As widely expected, the RBA left interest rates unchanged at its August board meeting on Tuesday. Although most analysts thought the board would leave rates at the current historic low of 1.5 percent, some thought that perhaps the central bank would cave in to pressure from tepid economic growth, weak inflation and a surging Australian Dollar.

Comments from RBA governor Philip Lowe last week also convinced investors the central bank wouldn’t act on interest rates. He clearly stated that rates would not be moving for a considerable period of time.

The RBA left its forecast for the Australian economy unchanged, but it did express a degree of anxiety about the impact a stronger Australian Dollar is having on economic activity.

“The higher exchange rate is expected to contribute to subdued price pressures (inflation) in the economy,” Dr. Lowe said in his post decision statement.

He further added, “An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

He also mentioned that problems still existed despite regulatory efforts to rein in rising levels of household debt. “Growth in housing debt has been outpacing the slow growth in household incomes,” Dr. Lowe warned.

Forecast

Based on the RBA statement, we have to agree with Dr. Lowe, the current low cash rate is likely to remain for some time. It’s now going to be up to the RBA to support its low interest rate at a time when other major central banks are tightening. The central bank clearly stated its displeasure with the strength of the currency, but it seems to have no control over its rise since most of the rally is being supported by the weaker U.S. Dollar.

On Tuesday, investors will have the opportunity to react to a slew of U.S. economic reports. The major report is the ISM Manufacturing PMI. The next level of key reports are Core PCE Price Index and Personal Spending.

Minor reports include Personal Income, Final Manufacturing PMI, Construction Spending and ISM Manufacturing Prices.

Any reports that show weakening inflation or suggest the Fed will refrain from hiking interest rates later this year could be bullish for the AUD/USD and NZD/USD.