What the RBA has planned for Australia and how it will affect the Aussie dollar

What the RBA has planned for Australia and how it will affect the Aussie dollar

At the time of writing, the Australia dollar is buying US$0.8255. The dollar last traded at these low levels in June 2010, but Reserve Bank of Australia (RBA) Governor Glenn Stevens has been quoted in an interview today as saying, “A year ago I said probably 85c was better than 95c and if I had to pick a figure now, I would say probably 75c is better than 85c.”

The weekly chart below shows the recent decline in the strength of the Australian dollar. While it has been swift, there is a willingness from the RBA to do what it can to keep it heading lower, in order to better reflect where it believes the currency should be trading against—chiefly—the US dollar. But what the RBA boss wants from Australia is more confidence. He himself sees key economic indicators in Australia as being pretty sounds, and he urges Australians to take an attitude that would see them say, “You know, I will do that project; I’m going to take that risk; I will borrow that money, because it’s so cheap; I will take on that worker; I will try that new process or product.”

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With so little optimism coming from the Australian government, it seems as though the boss of Australia’s central bank has taken it on his own shoulders to step into the limelight and talk the domestic economy up a bit. And could there be more stimulus on its way in the form of lower (than the current 2.50%) cash rates? Quite possibly, Mr Stevens, in answering the AFR’s questioning on the current deflationary environment as it relates to falling commodity prices etc., says, “a positive narrative might be inflation is not any impediment to even lower rates if they would be helpful. And I would say even now that I don’t think we’re going to have a problem with inflation being too high any time in the next couple of years from everything that I can see.”

It seems as though the view of the Bank is that with inflation not looking like a threat over the next couple of years, they’re comfortable to AT LEAST leave cash rates exactly where they are at 2.50%, with the obvious tone that they’re more than comfortable to cut rates given that there is no rising inflationary environment to obstruct them from doing so.

There has been a dramatic change in attitude by the market with regard to the RBA’s intentions for the cash rate. In the table below, taken from the ASX’s target rate tracker, you can see that there have been some strong changes in sentiment in the last week or two. On Tuesday 2 December, interest rate futures were pricing in a mere 13% chance of a cash rate decrease from 2.50% to 2.25%. You can see that as at yesterday’s calculation, there is now an implied 36% expectation of a cut at the February 2015 meeting – a near tripling of expectations in less than 10 days.

Mr Steven’s interview given to the AFR and published today on Friday 12 December will likely only fuel the expectation that the RBA may be ready to cut rates at its next meeting, which will signal to international investors that Australia may well become a lower-yield environment than it is presently. Our ability to continue to cut rates and stimulate the economy is a luxury that, for example, the UK, Europe and the US does not have, given rates there are so low already. So if Australia needs to (and the May 2015 Budget may be a disaster that warrants it), rates can still be cut significantly.

Keep an eye on your AUDUSD charts and (as per the red line below) watch for a retesting of the 2009 AUDUSD lows of around the mid-US$0.80 – it is clear that RBA boss Glenn Stevens wants to see the currency down below this level, and he will do what he can to give the world that very same impression.

Chart 01. AUDUSD weekly chart, demonstrating the recent decline in the strength of the Australian dollar

Source: Rivkin FX MT4 platform, data extracted 12 December 2014

Table 01. Target rate tracker

Source: www.asx.com.au

Chart 02. AUDUSD monthly chart, watch for a retesting of the 2009 AUDUSD lows of around the mid-US$0.80

Source: Rivkin FX MT4 platform, data extracted 12 December 2014

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