As the market waited for the policy meeting outcome of the Reserve Bank of Australia, the Australian dollar started the week with a slight change and could possibly fall further over the next three months. The currency has been among the worst performers in the stock market lately. Aside from the banks’ minutes, the decline of the currency was driven by correlating facts.
Based on the minutes from the RBA’s meeting in May, the cash rate was reduced to 1.75 percent on the budget day amid the current inflation trends. The central bank pointed out that inflation was to be persistently lower than previously forecast and it was possible that in time this could be reflected in lower wage growth.
The upbeat employment data in Australia last April did not bother the RBA to pursue cutting rates. During the last quarter, the market expected an employment growth of 20,000 and estimated a wage increase of 0.5 percent. However, the employment growth doesn’t have anything to do with the wages since it is more relevant to the improvement of the unskilled service jobs.
As the inflation was far from growth, the RBA will likely pursue more rate cuts. Thus, the Aussie will remain on the downside since lower interest rates make a lower Australian dollar as foreign inflows of capital looking for the return brought by higher interest rate in the country.
The AUD/USD used to be in the bullish trend at the start of the year, but as the RBA surprised the market with the first cut, the pair went vulnerable. Technically speaking, the Australian dollar is evidently exposed to the bearish trend.
China, the number-one exporter of Australia, reported an increase of 1.4 percent the previous week behind the falling iron prices. The Australian dollar has been dependent on the state of the Chinese economy and as China fails to create a necessary stimulus to drive growth, more or less, the Aussie has to deal with it.
Recently, the iron ore reserves were built in Chinese ports, a clear indication of a downturn of the relevant economic activities. Chinese economist commended the recovery of the housing market and government-led spending, but these were not expected to last as the real estate sector has to deal with hawkish policy in big cities. Also, bank loans were reported of contracting the past few months.
Earlier Tuesday, the Aussie edged higher as the soaring price of oil supported the currency. But, the gains could just be limited as long as the RBA calls for more rate cuts. Although the bank said that its board members had discussed the merits of adjusting policy or awaiting further information before acting, this does not ensure the finality of the RBA’s decision.
The Commonwealth Bank of Australia also lowered its forecast of the Australian currency. In a note released by the bank, it explained that a modest recovery in the global prices, an improved labor market conditions and the projected contraction of the current deficit of the country could be the reasons to push the currency on the other side.
Thus, with the projected further easing of interest rate of the RBA over the next months as the Federal Reserve left the interest rate unchanged and as China seeks for economic recovery, the Australian dollar was prone for more declines.