The Australian dollar plunged yesterday after the Reserve Bank of Australia hinted that it might slash interest rates in the upcoming monetary policy meeting. Even though the market participants were expecting a cut in the benchmark interest rate in the coming weeks, the affirmation of the dovish stance sparked an Aussie sell-off. The AUD/USD pair has dropped from 0.6929 to 0.6866 in the last 24 hours.
The Reserve Bank of Australia released minutes on Tuesday of the monetary policy meeting that took place two weeks earlier. Even though there were no monetary policy changes, the minutes of the meeting affirmed that the central bank is mulling over the option of an interest rate cut.
In a speech delivered yesterday, the RBA Governor Philip Lowe spoke about the rate cut and signaled that it could happen as early as next month.
Lowe said: “Members considered the scenario where there was no further improvement in the labor market in the period ahead, recognizing that in those circumstances a decrease in the cash rate would likely be appropriate. At our meeting in two weeks’ time, we will consider the case for lower interest rates.”
Recently, the RBA had stated that it would study the reason for continuously low inflation and would look at the option of slashing interest rates only if the labor market worsens.
The weakness in the labor market was clearly on display last week by a sharp drop in the NAB business survey’s employment index to its lowest level since 2015. It was followed by the release of labor force data that showed an increase in the unemployment rate to 5.2% in March, from 4.9% in the previous month.
Following the release of the minutes of the meeting, “interest rate markets priced in 17 basis points or roughly 69% of a rate cut at the June meeting.”
In the meantime, the Conference Board stated that Australia’s Leading Economic Index rose 0.3% in March. The February the increase was downwardly revised from 0.5% to 0.4%.
Likewise, the Westpac-MI Leading Index, an indicator plotted using a mix of local and global economic indicators to forecast near-term (three months to nine months) Australian economic growth, plunged to -0.47% in April, from -0.13% in March. The data suggests that Australian economic growth will remain sluggish in the near-term, extending the slowdown seen in the second half of 2018.
Furthermore, the latest data indicates that economic growth will be 0.47% below Australia’s normal growth rate, which is generally considered to be around 2.75% per annum, until this year-end. This implies that the Australian economy could grow at an annualized rate of 2.3%, unchanged from last year.
Bill Evans, a chief economist at Westpac, said: “The Index growth rate has been consistently negative over the last five months, a clear signal that economic growth through the three quarters of 2019 is likely to be below trend. This consistent ‘below trend’ signal from the Index is in line with Westpac’s growth forecast for 2019 of 2.2%.”
The dovish statement by the RBA and weak economic data is expected to keep the currency pair weak in the short-term.
The historical price chart indicates that the AUD/USD pair is trading below its 50-day moving average. Additionally, the stochastic indicator is in the bearish zone. As a result, we can expect the currency pair to continue moving within the descending channel.
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