Today in the morning, the Australian Central Bank (RBA) announced a decision on interest rates. It confirmed the dovish bias of the monetary authorities following the European Central Bank and the US Federal Reserve.
The main RBA interest rate was cut by 25 basis points from an already record low of 1 percent to 0.75 percent. This was the third interest rate cut in Australia this year. What's more, the interest rate market assumes a 70 percent probability that the cuts are not over yet. Another one is expected in December. If this happened, the main RBA interest rate would drop to 0.5 percent.
In response to the RBA's decision, the AUD/USD exchange rate fell by almost 1 percent, which was somewhat valued by investors on the currency options market who expected increased volatility. Thus, the Australian dollar has been very close to the lowest level in 10 years. The last level of defense is located at the low which was set at the beginning of August.
AUD/USD weekly chart. Conotoxia trading platform.
The Australian dollar has lost over 7 percent to USD over the past year, which is the largest fall in value from all major currencies. The key reason for AUD's weakness would be its vulnerability to the crisis in trade relations between the United States and China. China is a major trading partner for Australia and the downturn in Asia directly affects the condition of the Australian economy.
The Governor of the RBA noted that policymakers are ready to further ease monetary policy if necessary to support sustainable economic growth. He added that in Australia a longer period of low interest rates would be required.
The further fate of the Australian dollar seems to be depend on the relationship between the US and China. The improvement of relations between the superpowers could support the Australian economy, and then the chances of further interest rate cuts, which reduces the profitability of keeping a given currency, would be lower.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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