Australian Dollar after the RBA Policy Meeting
The monetary policy committee of the Reserve Bank of Australia met on Tuesday and moved to cut interest rates by 0.25%. In a statement after the meeting, RBA Governor Philip Lowe said they would closely monitor developments in the economy and, if need be, they will adjust the monetary policy.
The choice of the phrase “if need be” throws some doubt over the assessment by analysts that the bank would cut the rates further before yearend. For analysts, it was almost a foregone conclusion that the rates would go down a further 25 basis points.
After the meeting and the comments from the Governor, the Aussie jumped to the top of the table of G10 currencies. In particular, the rally seems to have emanated from the fact that the RBA is not certain on whether it will cut rates in the next meeting.
The Aussie’s performance against major G10 rivals was strong with the largest gain coming against the Swiss franc. Against the US dollar, the Aussie gained 0.32% while the British Pound lost 0.37% against the Australian dollar.
The further stimulus might be necessary
Despite the comments by Lowe, analysts think the possibility for a rate cut in August is still real. For starters, the RBA set the target to bring steer its unemployment rate to 4.5%. However, when the bank cut rates in May 2019, the stimulus was not targeted at reducing unemployment.
Knowledgeable observers think that the latest rate cut will not be enough to achieve the unemployment target. In addition, the bank intends to leverage today’s rate cut to stimulate faster economic growth and higher wages besides reduced unemployment rates.
After the May rate cut, the economy has remained subdued, and it could be getting worse. As such, the economy will need much more stimulus beyond July to achieve the ambitious targets set by the RBA.
The China factor
The Australian economy heavily relies on the health of China since it is its largest trading partner. Therefore, when China released the Caixin Manufacturing PMI on Monday, the Aussie was badly hit.
On Monday, July 1, 2019, the Australian dollar underperformed to the point of coming last among G10 currencies. To be sure, the AUD fell to a two-month low at 69.42 US cents. This was just hours after the currency rallied to a 24 hour high of $0.7031.
China has taken a hit from the trade war in which it is embroiled with the U.S. The latest Caixin-Markit manufacturing PMI data released on Monday signaled an economy which needs more propping to avoid a further decline.
To be sure, this PMI index fell to 49.4 in June compared to May’s 50.2. Further worrying is the fact that the index slipped under the 50-point level, which separates economic expansion from contraction.
At the end of Q2 2019, international sales and new businesses declined while the progress in exports established in May was eroded. This data imply that Australia could be facing a crisis in the near term. Ultimately, the RBA might need to ease rates further in August.