Last night’s Reserve Bank of Australia minutes were
unsurprisingly dovish given the downturn in Chinese and global growth over the
past few weeks and months. The minutes explained the key drivers behind the
central bank’s decision to cut interest rates at its meeting earlier this
month. As well as slower growth in Asia, lower commodity prices and weaker
domestic growth also topped the RBA’s list of concerns. The bank is now
envisaging a peak in resource investment, sooner and lower than
initially estimated.
An ongoing decline in coal coking prices is alarming the RBA
and there are reports of early closures of older mines and low take-up of new
resource projects. The mining boom has been a huge driver of Australian growth
in recent years and these tell-tale signs of decline are bad news for the
economy and the AUD as a result. Weakening demand from the eurozone is clearly taking its
toll on Chinese growth and the knock-on effect is weaker demand for Australian commodities.
The RBA is also very concerned about the aussie labour market.
We have had a decent Australian employment update this month but the
unemployment rate has climbed up to two-year high of 5.4% and the central bank
is anticipating a deterioration in the coming months, in no small more part due
to projected mining sector weakness. The mining sector has masked underlying weakness in the labour market for a while now, the truth should now emerge.
Australian Treasurer Swan indicated last month concerns over
a fall in Australian tax receipts, while the Government is committed to returning
to a budget surplus. The difference is being made up in budget cuts, which will
also weigh on Australian growth in the coming months.
Amid all these downside risks to Australian growth and the noticeably
dovish tone in these latest RBA minutes, we are expecting another interest rate
cut at the RBA’s next meeting in November. October 24 brings a key quarterly Australian
inflation figure but an upside surprise does seem very unlikely and the path
should be clear for another rate cut. This leaves plenty of scope for
AUD-weakness in the coming weeks and months.
Richard Driver
Currency Analyst
Caxton FX
