Aussie Down as RBA Signals Further Rate Cuts

Aussie Down as RBA Signals Further Rate Cuts
February 18, 2020


The Aussie declined against the Japanese yen even after a preliminary report published by the Cabinet Office indicated that Japan’s economy contracted by 6.3% in the December 2019 quarter. Notably, the Central bank of China’s announcement of an interest rate cut on medium-term loans had little impact on the Aussie. China is the largest trading partner of Australia. Therefore, usually, the Australian dollar reflects the developments related to China.  The main reason for the Australian dollar’s decline is the dovish looking monetary policy meeting minutes of the Reserve Bank of Australia. From a low of 73.94, the AUD/JPY pair rose to a high of 73.34 in the past 24 hours.

The GDP data published by the Cabinet Office of Japan was worse than anticipated. Economists had expected the economy to shrink only by 3.8% in the fourth quarter of 2019. The increase in consumption-tax had a negative impact on consumer spending. The reported GDP data indicated the first contraction in five quarters. It was also the most significant contraction since the tax was increased in 2014. It can be remembered that in 2Q 2014, the Japanese economy shrank by 7.4%.

The country’s economy contracted 1.6% on a seasonally adjusted quarterly basis, missing expectations for a contraction of 1%, following the 0.1% increase in 3Q 2019.

The final data published by the Ministry of Economy, Trade, and Industry indicated that Japan’s industrial production increased at a slower rate in December, compared with the initial estimate.

Industrial production increased 1.2% m-o-m in December. The preliminary estimate indicated a 1.3% rise in production.

Capital investments dropped 3.7% in the fourth quarter, missing forecasts for a 1.6% drop, following the 0.5% rise in 3Q19. Corporate investments declined by 3.7%. Similarly, exports declined by 0.1%. The global economic slowdown, primarily caused by trade tensions between the US and China, affected corporate investments and exports.

Private consumption decreased 2.9% on quarter and missed outlook for a decline of 2%, following the 0.5% increase in the earlier three months. Personal consumption accounts for over half of Japan’s GDP. It decreased by 2.9%, following the rise in the tax from 8% to 10% at the beginning of October 2019.

Some experts are anticipating the first quarter of 2020 to be sluggish, in case the coronavirus is not controlled soon. Regarding Japan’s first quarter, Mari Iwashita, chief market economist at Daiwa Securities Co., opined as follows: “I’m getting ready for another contraction in Japan’s first quarter. There just aren’t any positive factors to build a positive growth forecast.”

In China, the People’s Bank of China slashed the interest rate on medium Term loans on Monday to reduce the impact of the coronavirus (Covid-19). The central bank of China trimmed the medium-term lending facility (MLF) by 10 basis points to 3.15%. Using the facility, the bank offered CNY 200 billion worth one-year loans to banks and other financial institutions.

Despite the positive development in China, the Australian dollar declined as the Reserve Bank of Australia (RBA) maintained its benchmark cash rate at an all-time low of 0.75%, while signaling a possibility of further rate cuts.

The RBA stated that the possibility of further easing “rested largely on the only gradual progress towards the bank’s inflation and employment goals. The board concluded that the cash rate should be held steady at this meeting.”

The minutes of the meeting further indicated that the RBA is ready to implement a rate cut, if necessary. “The board would continue to monitor developments carefully, including in the labor market, and remained prepared to ease monetary policy further if needed…”

The dovish statement by the RBA is expected to keep the Aussie weak in the short-term.

The historical price chart indicates that the AUD/JPY pair is trading below its 50-day moving average. Additionally, the currency pair is declining after failing to break the resistance at 74.21. The next support is anticipated only near 73.05. The momentum indicator is also declining. Therefore, we are expecting the currency pair to move down in the short-term.

JPY - technical analysis - 18th Feb 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Ian Maguire

Ian Maguire

Ian is our resident contributor to the latest going ons in the cryptomarket, keeping up to date with the latest icos and coins

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