Australian Dollar Exchange Rate volatile with the RBA Rate Decision speculated for a Cut
Today provides a significantly high event risk day for the Australian Dollar Exchange rate against all majors -AUD/EUR, AUD/GBP, AUD/USD and AUD/NZD. As international markets return from the four day Easter break and the local market readies for a possible interest rate cut. A Rate cut will likely see further sell-off in the Australian Dollar against all the majors, however if RBA leave rates on hold we may well see the AUD makes some gains back as the speculation of a rate cut leading into the meeting may well have seen some of this expectation built into the current Exchange Rate.
Today the Reserve Bank of Australia (RBA) will announce their April Rate Decision. After keeping interest rates on hold in March, following a cut of 25 basis points in February, the forecast is that the RBA will actually cut rates further from 2.25% to 2.0%. This opinion is not however unanimous, with a number of economists and investors speculating that that the Official Cash Rate (OCR) will be placed on hold. At the close of business before Easter, the market was pricing in a 75 per cent chance that the RBA would take the cash rate down 25 basis points to 2 per cent at its Tuesday meeting. Those odds are a fair bit shorter than the 64 per cent betting on the same outcome just before the March meeting.
While most agree that there is sound argument for a move today; there is still some argument around the timing of the cut. The reasoning for those leaning in favour of a cut today include such factors as poor business investment, the high Australian Dollar, low inflation and falling commodity prices. The plunging price of iron ore in March is seen to be of key importance especially as the Australian dollar has only fallen by about 1 cent against the USD over the same period. Last week Australia’s largest export iron ore dropped to $US49 a tonne representing a 17 per cent fall in iron ore prices in March. This translates to a loss of 8 billion dollars in exports or 0.5% of Australia’s total Gross Domestic Product (GDP)
JP Morgan’s Senior Economist Stephen Walters commented last week “while there were credible arguments for the RBA to cut today — such as its positive shock value for consumer confidence and its dampening impact on the Australian dollar — there was a stronger case for a May cut”. “Waiting an extra month would allow the RBA to see the next quarterly inflation figures at the end of this month and digest another full round of the monthly data, including the March employment report, released the week after next”. Mr Walters pointed out that the RBA last month said that it was awaiting more information on the impact of the February rate cut.
Regardless of the outcome of the decision, it is expected that we will see significant volatility today. The results are due to be released at 2:30 PM AEST and the AUD Exchange Rate is likely to experience a high amount of volatility surrounding this release.
In other local releases at 11:30 AM AEST Australia will release its Retail Sales Figure for March and ANZ Job Advertisements. The Retail Sales figure is the primary gauge of consumer spending, which accounts for the majority of overall economic activity. The forecast is for retail spending to remain steady at 0.4% after a 0.2% rise last month. While these result will almost will almost certainly be overshadowed by the rate decision they may act as further early indication as to the direction of the RBA later in the day.