Reserve Bank of Australia’s upbeat stance turns upside down

Dovish signals on monetary policy reduce upside for the Australian dollar.

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On 6 February, Philip Lowe, governor of the Reserve Bank of Australia (RBA), sent clear dovish signals, indicating that a rate cut was now as probable as a rate hike. This led to a significant decline in the Australian dollar. This change in the RBA’s stance highlights increasing concerns around the Australian economic outlook.

This change in monetary stance mostly reflects increasing concerns over the accumulation of downside risks. On the external front, the slowdown in Chinese economic growth is the main worry, given the strong linkage through trades between the two countries (Australia’s exports to China amounted to roughly 35% of total exports in December 2018). On the domestic front, the outlook for consumption growth has become more uncertain.

While a rate hike is now highly unlikely over the next 12 months, it remains to be seen whether the external and domestic backdrop will necessitate a RBA rate cut, as is currently partly priced in by the market. However, the RBA’s position does suggest that the Australian dollar’s upside potential is more limited than previously thought. Consequently, we have decided to lower our three-month, six-month and 12-month forecasts to USD 0.73 (versus previous forecasts USD 0.74, USD 0.75 and USD 0.75  previously) compared to USD 0.71 on 12 February.

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