Time to Bail on the Australian Dollar?
After months of resilience against the U.S. dollar, it’s time to go short on the Aussie. The AUDUSD outlook dropped after the Australian central bank cut its interest rate on Tuesday by a quarter-point to 1.75%—the lowest ever for the bank.
This was a surprise move that aims to cap the Australian dollar’s appreciation against the greenback. It is also a move to establish a “healthier” level of inflation, which the country’s planners find too low for comfort now.
The Reserve Bank of Australia (RBA) trusts the Australian economy to continue growing and wants to encourage higher inflation. This suggests that the further easing of monetary policy is likely. Consumer prices fell for the first time since 2008 for the period from January to March, according to data released in late April. For the 12 months ended in late March, inflation reached 1.3%, well below the 1.7% recorded in 2015 and totally off a two- to three-percent inflation target.
The Australian economy continues to suffer from its reliance on mining commodities and it needs more stimulus to grow. Still, growth was three percent in 2015 and unemployment fell to 5.7% in March, the lowest level in two-and-a-half years, which suggests that the stimulus is working. Yet lower growth in China has sent more clouds over Australia’s growth prospects, given that it is its main trading partner.
The other factor supporting a bearish AUDUSD is that the U.S. Federal Reserve is still due for another rate hike. In December, the AUD dropped by some 100 points after the Fed’s 0.25% interest rate hike. Still, the sustained economic growth rate suggests that Australia has adapted to lower commodities. (Source: “AUD/USD – Aussie Drops Sharply After Historic Rate Hike,” Market Pulse, December 17, 2015.)
Australia is trying to stimulate manufacturing and other economic sectors to fuel growth. In other words, we can expect the RBA to follow the example of the European Central Bank (ECB), easing monetary policy—or quantitative easing—to boost employment generation. Until China’s demand for commodities picks up again, Australia is not counting on a resource-led recovery. Instead, monetary stimulus will be the name of the game.