29 April, AtoZForex, London – While Wednesday’s soft inflation report resulted in a slight change of RBA tone when it came to the outlook of Australian interest rates, Governor Stevens commented that policy is not a cure-it-all thus suggesting that he has little desire to cut interest rates even further next week.
“Until the release of the March quarter inflation report, speculation of a rate cut was limited to only a few commentators, and markets rated the probability of a cut at around 10%,” said Westpac chief economist Bill Evans.
The RBA is clearly concerned that lower interest rates would exacerbate and otherwise already stretched household balance sheets, argues CIBC bank. Despite the economy still exhibiting considerable slack, a reduction in risk sentiment on the back of cyclical rebound in Chinese data and a rise in iron ore and crude oil prices have seen speculative longs in the AUD extend to levels last seen in September 2014.
RBA cuts rates?
The rally in the local currency has tightened monetary conditions and will likely delay the rebalancing needed in an economy adjusting to lower commodity prices. This should work to weaken the currency over the rest of the year.
The question is whether the overvalued AUD will force the Board to apply its current easing bias and cut the cash rate by 0.25% during their next meeting scheduled on Tuesday.
“Markets and media strongly favor a rate cut. We are sticking with our view that the Board will decide to hold rates steady,” Bill Evans said.
Mr. Evans suggests that the decision will come down to the RBA’s outlook on whether the current policy stance will result in the bank missing its economic inflation and growth targets.
“Missing the target is not about moving outside the target range in the near term but staying outside the target range in the medium term,” he says.
In addition, currency investors should also be aware of political risk ahead of the 2nd of July general elections.
CIBC AUDUSD targets
CIBC targets AUDUSD at 0.75, 0.73, and 0.74 by the end of Q2, Q3, and Q4 respectively.
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