The AUD for the first few weeks in March has continued its downward spiral. Despite Interest Rates being a hold for March, it seems that the market is pricing in further interest rate cuts in the near term. This has, and is still, placing heavy downward pressure on the AUD/USD.
The Reserve Bank of Australia for the month of February stated in their meeting that the AUD remains overvalued, saying in the most recent minutes last month:
‘the Australian dollar had depreciated noticeably against a rising US dollar over recent months, although less so against a basket of currencies, and that it remained above most estimates of its fundamental value, particularly given the significant declines in key commodity prices.’
More importantly from the RBA minutes last month, it was said that monetary policy was to remain accommodative and further cuts were likely this year.
‘The Board judged that a further reduction in the cash rate would be appropriate to provide additional support to demand, while inflation outcomes were expected to remain consistent with the 2 to 3 per cent target.’
Similar sentiments today are expected to be expressed in the RBA minutes for this month’s, rate decision. The most likely reason for the RBA holding rates this month is that the move to cut rates was not entirely necessary at the time and it would be making a large statement cutting rates twice in a row.
Also, given that the interest rate levels are one of the most potent and useful tools to control an economy, the RBA has left the door open for future cuts as there is still interest rates to play with. Therefore they can remain accommodative and react to fluctuating economic conditions in Australia moving forward; this done without resorting to Quantitative Easing as our developed neighbours have been forced into.
Quickly to the USA for tomorrow night FOCM Meeting, the consensus expect the Fed to remove its pledge to be “patient” in raising short-term interest rates, giving them the flexibility to move as soon as June. The Federal Reserve has not hiked rates since 2006, and has also kept rates at zero since December 2008. If Interest rate hikes are brought forward it could mean we will see those sub-0.75 rates sooner rather than later.