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TALKING POINTS – ASX 200, AUSTRALIAN DOLLAR, RBA

  • Australian rate futures markets have started to tentatively price in lower interest rates
  • This is despite the Reserve Bank of Australia’s belief that the next move will most probably be a rise
  • Someone has to be wrong

Join our analysts for live and interactive coverage of all the major Australian economic data at the DailyFX Webinars. We’d love to have your company.

The Australian Dollar has lacked interest rate support for much of 2018, and the situation could worsen into the new year.

In public the Reserve Bank of Australia still insists that the most likely next move will be an increase in the record low, 1.50% Official Cash Rate. That has been unchanged since August 2016 and is already the longest unchanged base rate in modern Australian history.

Obviously this has put AUD/USD under some pressure as the US Federal Reserve has steadily increased its own rates, taking US yields up to and then beyond Australia’s.

However, the RBA’s problem is that the markets have never quite believed that rates would rise very far very soon. Now that problem seems to have become more acute. Australian rate futures markets used to price in an unchanged rate right across their eighteen-month forecast horizon.

In the last week or so that has changed. Now that market is starting to suggest that rates will be lower over that same period. Contracts do not yet fully price even a quarter-point cut, or anything like it. But they are starting to suggest that rates will be below 1.50% as we go into 2020.

AUD/USD enjoyed a brief bout of relative strength between mid-November and this week, as markets moved to price out the more extreme forecasts of tighter US monetary policy. Now however that strength is waning as investors start to doubt that the RBA will be able to raise rates and may even have to cut them.

This poses two problems for Aussie bulls. One is that of course the currency will continue to lack monetary support even if the Fed provides less of the same for the greenback. The other is the issue of central bank credibility. If the RBA sticks with its belief that rates are more likely to rise than fall while the markets clearly think otherwise, someone is clearly going to have to change their mind.

Given a combination of falling house prices, tightening credit conditions and limited growth, inflation looks likely to be mired for some time. Throw in all the other global economic worries, from trade war to Brexit, and the RBA’s optimism seems a little misplaced.

Of course, a surge back in global risk appetite could see the Aussie rise again, perhaps putting mid-December’s AUD/USD peak of 0.7395 back in prospect. However, absent that the currency looks vulnerable as we head into a new year, with the psychologically key 0.700 area likely to come under threat.

Australian Dollar, ASX 200 May Yet Face RBA Rate Cuts in 2019

Whether or not that can hold if challenged may tell investors much about the underlying sentiment toward the Australian currency.

One crumb of comfort might lie in the possibility that a still-lower Australian Dollar might see inflation pick up a bit. Sustained rises might offer the prospect of higher rates ahead, but this prospect would take time to crystalize,

Lower rates need not be bad news for the Australian stock market- a the very least they should support consumer spending. However, the ASX 200 tends to move very much with general risk appetite in any case which is why it currently languishes at new 2018 lows. The country’s financial sector is heavily weighted within the index, and that would certainly not welcome any move lower for the OCR.

In any case the ASX’s monthly chart shows a precipitous fall form this year’s peaks, arrested so far by support at the lows of July-November, 2016. It’s notable also that upward channel support from February of that year has been conclusively trashed.

Australian Dollar, ASX 200 May Yet Face RBA Rate Cuts in 2019

The end of 2018 is an uncertain time for all growtt- linked assets wherever they are, but it seems that Australia’s have more to worry about that most.

Resources for Australian Dollar Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

--- Written by David Cottle, DailyFX Research

Follow David on Twitter @DavidCottleFX or use the Comments section below to get in touch!