Cautious Stance from RBA Triggers AUD/USD Exchange Rate Losses
The Australian Dollar to US Dollar exchange rate (AUD/USD) has dropped by -0.3% today, after the Reserve Bank of Australia’s (RBA) policy meeting for February.
RBA officials have left interest rates on hold at 1.5%, but the more concerning factor is that the bank seems a long way off any monetary policy adjustments.
Giving her reaction to the RBA’s ‘business as usual’ policy meeting, JP Morgan Australia and New Zealand Chief Economist Sally Auld said;
‘It was noted that “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual”.
This is a signal that the next move in rates will be up, but not anytime soon.
While other parts of the economy have firmed, particularly business investment, our view is that the net outcome will still be sub-trend growth [and] inflation below target.
This is clearly a different narrative for the economy relative to that presented by the RBA in today’s Statement, but it underscores our view that the RBA will remain firmly on hold in 2018’.
Stock Market Slide Weakens USD Exchange Rates
While the US Dollar has advanced by 0.3% against the Australian Dollar today, this appreciation has not been universal.
The US Dollar has struggled elsewhere because of a widespread slump in stock market prices, partly caused by speculation about the US Federal Reserve.
For context, over 2017 US stock markets saw historic levels of growth, in part fuelled by hopes that President Donald Trump could reinvigorate the US economy.
In a recent reversal of opinion, however, optimism in Trump has faded, which has contributed to the stock market decline.
Another factor has been the concern that the US Federal Reserve could raise interest rates at a faster pace than previously expected.
While higher interest rates are good news for savers, they generally lead to falling stock market values because of lower profits and reduced borrowing for investment.
Given how well stock markets performed in 2017, the latest slump was seen as somewhat inevitable, but has still shocked stock and currency traders.
Australian Dollar to US Dollar Forecast: Rising Construction Stats could Boost AUD/USD Rate
The Australian Dollar could extend its gains against the US Dollar in the near-term, when the Australian construction PMI for January will be announced.
This data will be released on Wednesday morning and is predicted to show growth in the Australian construction sector.
Apart from further stock market fluctuations, the next US Dollar shift could be caused by speeches from Federal Reserve officials over Thursday.
The Fed is currently in the spotlight because of speculation about when the next interest rate hike could take place.
If Fed officials hint at higher interest rates in the coming months then the US Dollar could turn volatile against the Australian Dollar.