After rising as much as 1% yesterday, the Australian dollar tumbled to 0.7125 against the greenback on Wednesday morning after an unexpected dovish switch from the central bank. On Monday, Reserve Bank of Australia Governor Philip Lowe avoided guidance to market participants, especially regarding the interest rate outlook. Investors believed that they could expect the RBA to move slowly toward tightening, if inflation and economic conditions allowed it. However, the next day Governor Lowe gave a speech in Sydney in which he adopted a more cautious stance.
Even though Australian economic growth is expected to remain reasonable, “downside risks have increased”. Accordingly, RBA’s growth forecast has been revised to the downside. The biggest change concerns monetary policy. Governor Lowe declared that “Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced”. This was a game changer for investors as it clearly suggests that the RBA would cut rates if needed. In our opinion, the RBA wants to keep some room for manoeuvre, in case the Chinese slowdown proves to be more acute. More than 38% of Australia’s exports go to China. We expect the Aussie to remain under pressure until at least the end of the Sino-USA trade conflict.
