- RBA Stuck Between Slowing China and a Weaker U.S.
- AUD/USD Traders Await RBA Rate Decision
- Australian Housing Market a Concern
- Kiwi Dollar Nears Parity with Aussie
The AUD/USD appreciated after the U.S. employment shock on Good Friday. The move was contained as Aussie-focused traders await the interest rate decision from the Reserve Bank of Australia (RBA) tomorrow. Presently the pair is trading at 0.7620 to 0.7640 as investors anticipate a rate cut that would leave the Australian benchmark rate at 2%, the lowest on record. The market has forecast a rate cut either in tomorrow’s meeting or the next month. Surveyed analysts unanimously point to a 2% rate by May, but only 40% expect it to happen this week. The uncertainty regarding the timing will keep the AUD flat until after the decision from the RBA on Tuesday at 12:30 a.m. EDT.
Lower commodity prices have wreaked havoc on the Australian economy. A stronger USD had been a blessing Down Under as it had the double effect of lifting commodity prices, and making the AUD more competitive thereby boosting exports. Meanwhile, the U.S. nonfarm payrolls (NFP) data for March reminded the market how fragile the U.S. recovery can be.
The USD was left reeling after the NFP report derailed the possibility of an American rate hike in June. The U.S. added 126,000 jobs last month, falling well short of the expected 245,000; the lowest reading stateside since December 2013.
Kiwi Dollar Closes in on the Aussie
Meanwhile, the AUD/NZD has been flirting with parity. The New Zealand economy has proven to be more resilient to the current global slowdown. Commodities are the country’s main exports, but the bulk of Kiwi exports are agricultural and less likely to be affected by economic shocks. Australia, on the other hand, exports minerals that are tied to manufacturing which has been the reason the Chinese slowdown has hit the Aussie’s economy particularly hard.
Home Prices, Iron Ore Weigh on RBA
The price of iron ore, Australia’s biggest export, has been on the decline, and it dragged the Aussie dollar lower before the U.S. NFP disappointment reversed that trend. The question is will recent events force the RBA’s hand to cut the Australian benchmark rate? Melting iron ore prices have fallen by a staggering 47% since last year as Chinese demand shrank, and a supply glut is flooding the market, in turn pointing to a continued downward trend. Exports to China constitute a third of all of Australia’s exports. A frothy housing market is the RBA’s main concern with lowering rates too soon. House prices in Australia have risen by 35% since 2012.
The RBA faces a tough choice, as the market knows that it needs to cut rates in order to boost economic growth. The timing could be somewhat of a surprise if it decides to hold, which would boost the AUD beyond current levels, and signal a May rate hike. However, cutting rates this week could backfire on the central bank as the market has not fully absorbed the impact of the soft U.S. NFP.