Despite a rate cut from the RBA at the beginning of the month July, the Australian dollar reversed momentum following Jerome Powell testimony before the Congress. In fact, G10 commodity currencies outperformed their peers since then with the Kiwi, the Aussie and the NOK rising 1.83%, 1.46% and 1.21%, respectively.
Safe-haven currencies were also better bid with the Swissie and yen up 0.94% and 0.71%, respectively.
As mentioned above, on July 2nd, the Reserve Bank of Australia trimmed the Official Cash Rate by 25bps to record low 1% following worries over job market slack and especially the level of underemployment. Indeed, just like his American counterpart, Governor Lowe is committed to use monetary tools not solely to increase price pressure but also to reach full employment.
The minutes were fairly in line with the July statement. More specifically, the minutes highlighted the RBA’s commitment to reduce further the level of interest rates to support growth in employment and incomes and bolster overall economic conditions, with the ultimate goal of lifting inflation back within the 2%-3% target band. All in all, the minutes confirmed the fact that the RBA has a clear dovish bias and will not hesitate to pull the trigger should the conditions justify it.
The slowdown of the Chinese economy, together with heightened uncertainty caused by trade tensions across the globe, increase the likelihood of further cut before the end of the year. In addition, the Fed and ECB have already signalled that they are going down that road; there is no doubt the RBA would mimic them. AUD/USD is down 0.10% on Tuesday morning at around $0.7033. Early this morning, the pair tested the resistance that lies at 0.7048 (high from July 4th) and faced rejection.
We believe that the slowing Chinese economy, together with the fact that the RBA a much more room to manoeuvre in monetary terms than most of its peers, will prevent the Aussie to extend gain significantly.
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