After political drama kept the Australian dollar under pressure over the past weeks, the currency will now turn its sights back to economic developments, with a policy decision by the RBA and updated GDP figures being on tap this week. Some remarks by RBA chief Philip Lowe will also be closely watched. Downside risks linger for aussie/dollar, though a clear break below the 0.7160 area that provided reliable support in the past is needed to reaffirm the downtrend.
The Reserve Bank of Australia (RBA) is virtually certain to keep its benchmark interest rate unchanged when it announces its policy decision on Tuesday at 0430 GMT, with investors pricing in a zero probability for a rate increase according to Australia’s overnight index swaps. In fact, the Bank is not expected to act at all in the foreseeable future, with market pricing pointing to practically no odds for a rate hike over the remainder of 2018. Looking at Australian economic indicators, one may consider such pricing to be overly pessimistic, at first glance. The economy grew by an impressive 3.1% y/y in Q1, inflation clocked in at 2.1% y/y in Q2 to reenter the RBA’s 2-3% target band, and the unemployment rate declined to a six-year low of 5.3% in July.
A closer inspection though, reveals that Australian consumers continue to struggle. Wages grew by 2.1% in Q2, the same pace as inflation, keeping real wage growth flat and providing little relief for the heavily-indebted Australian households that have been waiting for a pay rise to ease their debt burden. Cautiousness among consumers, in turn, clouds the outlook for spending and economic growth. Making a bad situation worse, mortgage rates provided by major Australian banks have risen lately even despite the RBA keeping its own borrowing costs unchanged, squeezing consumers even more. Then, there’s the uncertain outlook for global trade, which renders Australia vulnerable to an external shock given its dependence on exports.
Considering these hazards, and especially the recent surge in mortgage rates, the risks appear tilted towards a more cautious-sounding narrative by the RBA. While policymakers are unlikely to go as far as placing the prospect of a rate cut back on the table, they could well reinforce the concept that rates will stay on hold for a prolonged period. As for the aussie, such a tone is unlikely to provide relief to the battered currency, which touched a fresh 21-month low of 0.7164 against the dollar earlier today. Downside risks linger, though note that the 0.7160 zone in aussie/dollar provided reliable support in the past, and a clear break below it is needed to signal a resumption of the downtrend. A few hours after the decision, at 0930 GMT, RBA Governor Lowe will deliver remarks. His comments will be scrutinized for any policy hints, particularly on topics the meeting statement may not elaborate much on, like rising mortgage rates.
Turning to the GDP data for Q2, which will be released on Wednesday at 0130 GMT, the forecast is for economic growth to have slowed in both yearly and quarterly terms. Specifically, the economy is projected to have grown by 0.8% q/q, from 1.0% q/q previously, which would drag the yearly rate down to 2.8%, from 3.1% in Q1. In fact, after Australia’s capex data for the quarter surprisingly showed a fall in capital investments last week, a weaker-than-expected GDP reading should not be ruled out. For the record, the RBA’s own forecasts imply a growth rate of 3.0% y/y in Q2, so even the anticipated 2.8% may come as a disappointment for policymakers.
Technically, further declines in aussie/dollar below the 0.7160 area could open the way for the round figure of 0.7100. Even lower, the psychological handle of 0.7000 would increasingly come into view.
On the contrary, in case of a rebound, immediate resistance may be found near the 0.7240 area, marked by the inside swing low on August 23-24. An upside break may see scope for a test of the 0.7380 hurdle, defined by the highs on August 21, with even further advances aiming for the 0.7485 barrier – this being the high of July 10.
