FX comment – AUD declines on dovish RBA minutes

by: Roy Teo

  • RBA minutes slightly dovish
  • Q1 CPI print on 22 April crucial for next rate cut timing
  • AUD recovery falters

 

RBA minutes slightly dovish

The RBA minutes released this morning was slightly dovish in our view. The RBA stated that the further deterioration in Chinese property market conditions had placed some additional downward pressure on Australia’s key commodity exports. In addition non-mining investment would remain subdued for longer than previously anticipated. Furthermore despite early indications of strength in resource exports since the beginning of 2015, lower commodity prices are expected to lead to some reduction in production and therefore exports this year. The RBA also overlooked the decline in unemployment rate in February, stating that other labor indicators continue to imply spare capacity in the labor market. On the housing market, growth in housing credit is assessed to grow at recent rates but not accelerate in the months ahead. Having said that members are concerned that the low levels of interest rates could foster imbalances in the housing market. Work is still in progress with other regulators to assess and contain risks arising from the housing market. On the exchange rate, a lower Australian dollar (AUD) would help to achieve a more balanced growth in the economy. Given the recent declines in key commodity prices, a further depreciation in the AUD is also likely.

Q1 CPI key to next RBA move

We maintain our view that the RBA is likely to cut the official cash rate (OCR) by another 50bps this year. Tomorrow’s Q1 inflation print will be crucial as the RBA stated that they saw advantages in receiving more data including inflation to assess the impact of previous rate cut. Financial markets have pushed back the next rate cut to June/July.

AUD recovery falters

The recovery in the AUD in the past week has faltered just below 0.7850, a lower peak than previous resistance level above 0.79. This is a sign of weakness in our view. Stop losses are expected to be layered below 0.7670. We expect any weakness in the AUD to be limited towards 0.7550-0.7600 ahead of inflation numbers tomorrow morning. Looking ahead, the divergence between economic growth in Australia and the US will put downward pressure on the AUD/USD. Furthermore interest rate differentials are expected to narrow as the RBA lowers the OCR from 2.25% to 1.75% while the US Federal Reserve is expected to raise the Fed funds rate to 0.75% later this year. We expect the AUD/USD to decline towards 0.72 by the end of 2015.