Australian Dollar Dips In Anticipation Of RBA Rate Call

The Australian dollar was trading in a holding pattern on Monday afternoon ahead of Tuesday’s interest rate decision by the Reserve Bank of Australia, with odds jumping in favour of a cut.

Better-than-expected Chinese manufacturing PMI data pushed the Australian dollar up to US78.3¢ at the start of trade, but that soon dropped. The dollar was trading around US77.65¢ in late afternoon trade.

“It’s down a bit today, it’s down about half a cent,” said Commonwealth Bank of Australia currency strategist Joseph Capurso.

“We initially got a bump up with the Chinese PMI data, but that was largely ignored and now people are positioning ahead of the Reserve Bank’s decision.”

If the cash rate was cut the dollar would fall about half a cent, he said. If they stayed the same, they would rise half a cent.

“We think they will cut,” he said. “But even if they don’t cut on Tuesday, we think they’ll cut again in the next few months.”

Mr Capurso said odds had recently lifted from 39 per cent to 56 per cent that the bank would cut rates.

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“I think part of it is commodity prices, which are still pretty soft,” said Mr Capurso. “The going-ons in Europe are still not resolved; China’s economy is still softening; and Australian economic data here is OK but still not good. The capital expenditure data we got last week was pretty hopeless and that’s what’s got people thinking they’ll have to cut again, if not on Tuesday then soon enough.”

OzForex Foreign Exchange dealer Michael Judge said the dollar could go above US79¢ on Tuesday should the Reserve Bank cut the cash rate, which is currently at 2.25 per cent.

“While we are favouring a hold result over a cut, we acknowledge a follow up cut may remain just around the corner,” he said.

“The Reserve Bank last month did not signal a quick follow up cut, while previously it has been keen to cut rates in quick succession,” he said. “It must be remembered that rates pre-February were already at record lows with the most recent adjustment coming off the back of a downgrade to its economic outlook.”

If rates were cut, he said, the Aussie would be within range of an eight-year low of US76.2¢.

Capital Economics economist Paul Dales said a rate cut was quite likely. Gross domestic product growth in Australia in 2015 would slow to just 1.8 per cent, he said.

“We believe this will prompt the Reserve Bank to reduce interest rates by more than is widely expected. By the end of the year, we expect that the Reserve Bank will have cut interest rates to 1.5 per cent.”

This news story is reprinted from www.smh.com.au

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