Stronger AUD/USD to be Thorn in RBA’s Side

Traders and economists are the most united they’ve been this year that central bank Governor Glenn Stevens needs to cut rates Tuesday in the face of a stronger currency.  The market is pricing in a better than 75 percent chance borrowing costs will fall to a fresh record of 2 percent and 25 of 29 economists also predicted a quarter-point reduction.

Galvanizing the forecasts is a rebounding currency hovering at 78 U.S. cents and a stalled recovery in the price for iron ore that underpins export earnings. Policy makers also face the risk that firms outside of mining that were supposed to pick up the slack in the economy will actually reduce investment in an economy growing below it’s potential.

“The recent surge in the Australian dollar would be viewed quite dimly by the folks at the Reserve Bank,” said Bill Evans, chief economist at Westpac Banking Corp. Failing to cut rates “in the face of such strong market pricing will affect the bank’s credibility over time,” he added.