So now that the RBA has cut rates, the question is: What’s next?
The statement from RBA Governor Glenn Stevens didn’t offer a clear guide to how much, or how little, the central bank may cut in the remainder of the year.
The market was priced for about 58 basis points of easing in 2015 but with this cut, those risks are certainly to the upside.
Stevens certainly didn’t close the dollar to further cuts in the final lines of the statement:
At today’s meeting, taking into account the flow of recent information and updated forecasts, the Board judged that, on balance, a further reduction in the cash rate was appropriate. This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.
What Stevens was most clear on was the exchange rate, which he said remains above most estimates of its fundamental value.”
That’s hardly a strong attack but his other comments almost sound as if he’s targeting a lower Australian dollar.
A lower exchange rate is likely to be needed to achieve balanced growth in the economy.
The best guide for what happens next, may be the comments on growth.
In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak.
As we saw with the Bank of Canada and Bank of Japan in the past few months. A central bank surprise can have a long-lasting and significant effect on a currency. This one is less of a surprise than those two but don’t underestimate how far AUD/USD can fall as traders toy with the idea of an extended rate cutting cycle.
RBA Stevens – AUD bulls beware
