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The Australian central bank (Reserve Bank of Australia, RBA) left its key cash rate unchanged in yesterday’s monetary policy as widely anticipated. The statement is just as boring to read as the decision, as its view has hardly changed compared with last month, cash rate unchanged at a record low of 1.5 pct.
Inflation remains quite weak, but it expects, just as we do, that during the course of the year inflation will return to its target range of 2-3%. Principally the economy is developing in a positive way, but the outlook is affected by the threat of a global trade war. As a small open economy, this uncertainty is particularly relevant for the Australian economy.
Above all as foreign trade was an important growth driver last year. At least the development of the Australian dollar is satisfactory for the RBA, as it has depreciated since the start of the year, thus supporting the export sector. As long as the RBA maintains its neutral approach the AUD’s appreciation potential is likely to be limited for now.
Hence, we expect both monetary policy divergence and modestly weaker commodity prices to push the currency lower. We are also expecting the pace of domestic growth momentum to decline in 2H’18, after a boost from net exports in the first half of the year.
The 3 cent fall in Apr-May brought the pair back to well within short-term fair value ranges. Yield differentials along the curve continue to move steadily in the US dollar’s favor, but Australia's commodity basket has recovered some of March's steep losses, with demand for industrials resilient. US-driven trade tensions have eased and equity volatility has edged lower since early April. We look for 0.76 end-Jun, 0.75 end-Sep.
Accordingly, one can uphold shorts in futures contracts of mid-month futures with a view to arresting further downside risks.
Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 121 levels (which is bullish). Hourly USD spot index was at shy above -23 (mildly bearish) while articulating (at 09:51 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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