Australian dollar is up today, but risk of further declines are 'concrete for now' warn UniCredit Bank
The Australian dollar (Currency:AUD) is enjoying an extension of this week's recovery bounce; fuel has been added to the recovery on observations that the Reserve Bank of Australia is not displaying an aggressive desire to cut interest rates further.
"The RBA minutes left the door open for more easing, although the bank indicated that policy is correct for now given the AUD fall. Still, risks of a further AUD-USD dip towards 0.90 remain concrete in the near term," says UniCredit Bank.
In the wake of today's RBA minutes we see:
- The pound to Australian dollar exchange rate is 0.88 pct in the red at 1.6453.
- The euro to Australian dollar exchange rate is 0.75 pct lower at 1.4251.
- The Australian dollar to US dollar exchange rate is 0.97 pct higher at 0.9187.
NB: The above quotes are taken from the wholesale spot markets, your bank will affix their own discretionary spread to the figures. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering you more currency. Please learn more here.
Chris Weston at IG says:
"In a market searching at every turn for clues of an August cut, the minutes today have shown absolutely no rush to ease again.
"This is a market that is short AUD in a big way and positioned for an August cut; narrative that policy was appropriate for the time being, especially in light of the falls in the AUD suggests the bank is in no rush to ease again."
Jeremy Cook at WorldFirst echoes the viewpoint that the Aussie has taken some relief from the stance at the RBA:
"AUD has bounced back strongly overnight having hit the lowest level against USD since September 2010 on Friday. The Chinese growth story was the initial catalyst yesterday and hawkish minutes from the Reserve Bank of Australia overnight have extended these gains.
"The central bank told us that the fall in the AUD in recent months, combined with the past interest rate cuts meant that current interest rates were appropriate. While this does not completely rule out the prospect of a rate cut in the near-term, it does lessen the haste with which the bank is likely to act."
RBS: Further declines in the Australian dollar are wanted
The RBA minutes reveal some further deterioration in the RBA's outlook.
In particular they note in the mining sector, "a significant decline in the planning and development work that is a precondition for new projects." This points to a sharper down turn in mining investment, albeit after "some quarters given the considerable volume of firmly committed work."
It is also not seeing any near term pick up in non-mining investment.
It said, "Members were briefed that the Bank's liaison suggested that the near-term outlook for non-mining business investment remained modest, in line with a range of other indicators and survey measures."
Offering a slightly different perspective on today's events is Greg Gibbs at RBS who says he believes the RBA would like to see further decline in the Australian dollar.
"The depreciation in the AUD was a major feature ahead of the last RBA meeting and it appears to be clearly the reason the RBA held back from a further rate cut. While acknowledging the effective policy easing from a lower exchange rate, the RBA appeared keen for it to fall further, over time to offset the down-turn it sees coming in the resources sector and lower commodity prices."
The RBA said, "The most significant change had been the depreciation of the exchange rate, though members noted that it remained at a high level. The depreciation was expected to add a little to inflation over time, but the forecast was for inflation to remain consistent with the target. Members noted that it was possible that the exchange rate would depreciate further over time as the terms of trade and mining investment declined, which would help to foster a rebalancing of growth in the economy."