The Reserve Bank of Australia left its key cash rate at a record low of 3.0 percent and also noted that the domestic economy was not as weak as expected as it saw signs of stabilization in the global economy. However, the central bank did see the scope for further easing if conditions deteriorated which is a scenario that traders are starting to gravitate toward.
Australian Dollar At Risk as Investors Weigh Outlook For Future Policy
Fundamental Outlook for Australian Dollar: Bearish
- RBA Leaves Its Benchmark Rate On Hold For Third Month
- TD Securities Inflation Gauge Rose 0.4% in June, but Remained Below Target Range For Second Month (YoY) at 1.4%
- Australian Change in Employment Fell by -21.4K, Pushing the Unemployment Rate To 5.8%
The Reserve Bank of Australia left its key cash rate at a record low of 3.0 percent and also noted that the domestic economy was not as weak as expected as it saw signs of stabilization in the global economy. However, the central bank did see the scope for further easing if conditions deteriorated which is a scenario that traders are starting to gravitate toward. Indeed, we saw risk appetite wane and the Australian dollar lose support as markets are questioning the scope of a recovery and putting more stock in the possibility of a double dip recession. We saw the DailyFX carry trade index fall 500 points from a week ago on the dimming optimism. The Australian economy loosing another 21,400 jobs in June is a sign that companies are continuing to cut costs in the face of the uncertain economic environment. Despite the weak labor market consumer confidence rose to a 19 month high, but we are starting to see sentiment indicators lose steam over the uncertainty of future growth.
A rise in inflation of 0.4% in June will alleviate some pressure from the RBA to continue easing, but the annualized rate at 1.4% and below its target range for a second month could leave them on hold for sometime. Credit Suisse overnight index swaps are now pricing in 39 basis points of a rate increase, but it has fallen from 78 in early may and 58 a week ago. The declining interest rate expectations may continue to add pressure to the Australian dollar , especially if we see demand for risky assets fall. The upcoming earnings season will present considerable event risk for the currency. If companies start to disappoint pointing toward a protracted recovery then we could see the carry trade continue to unwind and the AUD/USD fall.
The economic calendar will not provide as much event risk as last week with second tier indicators NAB business confidence and Westpac leading indicators on tap. The sentiment index rose 12 points last month which was the most in eight months, so it could see a tepid response this month with growth concerns increasing. We could see the forward looking Westpac gauge struggle to build upon consecutive months of improvements with equities under pressure. The AUD/USD has seen solid support at 0.7784- the 38.2% Fibo of 0.6952- 0.8267. Therefore, a clean break below the level could lead to extended losses with a possible test of 0.7500. - JR
