The AUD has suffered a 5.0% drop
against the pound in the past month, as well as a 3.6% drop against a broadly
weak US dollar. Weak Chinese data added to the negative regional tone evident
in the Asian markets at present. The Chinese manufacturing sector contracted in
August for the first time since November 2011 and by more than was expected.
All is not well with Australia’s key export partner and data has been poor on
the domestic front also. Data this week has revealed that Australian retail
sales contracted by an alarming 0.8% in July. Understandably, the aussie dollar
has fallen further out of favour as a result.
A key factor which is adding
pressure to the AUD is the fact that iron ore prices have plummeted of late, in
line with the deteriorating growth and demand outlooks for China. Interestingly,
the Reserve Bank of Australia’s McKibbin has commented recently that “things have
changed a lot in the last month…I now have further downside risks in my
forecasts for interest rates.”
So what is the Reserve Bank of
Australia going decide at its monthly meeting tonight? Well, ahead of an
Australian GDP figure which is likely to indicate growth of around 0.9% during
the second quarter, it is hardly panic stations. This is very backward-looking
data though and the truth is that economic conditions in Australia have really
declined in the third quarter. Nonetheless, very few will be expecting the
Reserve Bank of Australia to cut its 3.50% interest rate tonight, and we are
not among them.
It seems quite clear that the
central bank is very much in ‘wait and see’ mode. RBA Governor Stevens recently
emphasised that is “too early…to tell how much difference the sequence of
decisions to lower interest rates has made to the economy." The RBA will
be concerned with the Australian economy’s recent underperformance but not
overly surprised, as downside risks to near-term growth were noted in August.
Another rate cut is wholly possible, if not probable in Q4 (which could be
brought forward if the Eurozone crisis drastically deteriorates), but the RBA
will remain on hold for tonight. However, this is unlikely to provide the AUD with much relief.
Richard Driver
Currency Analyst
Caxton FX
