Expectations for a rate cut from the Reserve Bank of Australia (RBA) from 2.25% to 2.00% have gathered momentum in the last week with the RBA rate indictor showing a 71% chance of a cut, up from 50% just one week ago. However there are arguments and supporting evidence for both camps.
A bounce back in Iron Ore prices, stronger than expected first quarter inflation results, along with better than expected employment data in recent weeks, show evidence that the RBA may continue to leave rates on hold at 2.25%. However keeping rates on hold may increase the chance of the Australian Dollar (AUD) moving up in value as investors may see it as a sign that the AUD may continue to provide a higher yield than most currencies and expect rates to stay on hold for a little while longer.
One of the four economists predicting a “hold” is HSBC’s Paul Bloxham, who – like most other economists – still expects Tuesday’s decision to be a very close call. “This month appears to lack a clear trigger for a rate cut. If anything, the domestic data has surprised on the upside,” said Mr Bloxham, who still predicts another rate cut but expects the move to be in the third quarter.
The other view which seems to be the majority for now is that rates need to be cut on Tuesday and point to a sluggish outlook for the Australian Economy moving forward with little or no growth expected. “Of most concern to the bank is new data on business investment plans, which shows that not only is mining investment set to fall sharply in 2015-16 but that non-mining investment is expected to fall as well, despite the talk about new economic drivers emerging to take the place of mining.” said Fairfax media’s Peter Martin who classes himself as an RBA watcher.
He also commented that the RBA are beginning to realise that unless they cut the cash rate, the financial markets will stop believing that a cut will arrive and push the dollar even higher.
From the RBA’s point of view this would be a bad thing for the AUD as it is sitting closer to the USD 0.80c mark rather than the 0.70-0.75c mark they think is fair value for the AUD.
As of 08:00 AEST on Monday the AUD/USD exchange rate was trading at 0.7834.
AUD/GBP faces a week of volatility.
The AUD/GBP exchange rate faces a big week of volatility with the Reserve Bank of Australia (RBA) committee deciding on the Official Interest Rate on Tuesday and follow by the UK elections on Thursday.
The AUD/GBP exchange rate has been ranging between 0.50277 and 0.53027 between February and May 2015. We could see the AUD/GBP bounce between these figures within minutes of the RBA decision. After the initial spike we should see a short period of stability before the UK confirm their new Prime Minister and again we should see a spike in rates one way or another depending on results.
If you are holding either AUD or GBP keep your eyes on these very important decisions this week as they will have a big impact on the value of both currencies.
As of 08:00 AEST on Monday the AUD/GBP exchange rate was trading at 0.5168.