AUSTRALIAN DOLLAR, RBA, LOWE, CHINA, TRADE WAR - TALKING POINTS:
- Aussie Dollar up as RBA rhetoric just meets already dovish market bets
- Incoming testimony from Governor Lowe unlikely to be game-changing
- AUD remains vulnerable as US-China trade war escalation continues
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The Australian Dollar spiked upward as the RBA disappointed battered markets' hope for robust policy support, adopting a more measured posture. The central bank held the benchmark Cash Rate unchanged at 1 percent, as widely expected. The accompanying statement was duly dovish all else being equal, but market pricing seemed to reflect that much already. Investors have fully baked in at least one more cut this year.
RBA Governor Philip Lowe said that “it is reasonable to expect that an extended period of low interest rates,” adding in rather explicit terms that officials stands ready to “ease monetary policy further if needed”. Overall growth was “lower than earlier expected”, inflation pressures were “subdued” and “little inroad into spare capacity” has been made despite encouraging employment growth.
US-CHINA TRADE WAR LIKELY TO DRIVE AUSSIE DOLLAR PRICE ACTION
While the tone here is clearly defensive, a sense of urgency that might have inspired a dovish shift in priced-in policy bets seems absent. Tellingly, Australian front-end government bond yields popped alongside the currency as the rate decision crossed the wires. Mr Lowe is due to testify in Parliament on Thursday. He might take the opportunity to fine-tune rhetoric somewhat, but probably not tectonically so.
This probably puts the escalating US-China trade war in focus. An uneasy calm has settled over financial markets after yesterday’s bloodletting, but the underlying issues at play are far from resolved. The rhetoric out of Beijing and Washington shows no signs of cooling and the risk of another provocative step from either side that sinks the Aussie Dollar amid broader liquidation seems especially high.
AUD/USD and Australian 2-yr yield chart created with TradingView
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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
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