Early yesterday, the Reserve Bank of Australia (RBA) released the minutes of its meeting last September 4. Once again, RBA officials all agreed to keep rates steady at 3.50%, but the minutes did reveal that the central bank believes that there could be room to cut rates sometime down the road.
One of the key takeaways from the minutes was the RBA’s concern about the state of the Chinese economy.
For one, Chinese manufacturing contracted for the first time in nine months, as the purchasing manager’s index printed at just 49.2 in August, down from the 50.1 reading in July. Moreover, the export orders component remained at 46.6, marking the third straight month that export orders have fallen.
This suggests a tougher slowdown for the Chinese economy, which in turn doesn’t bode well for the Australian economy. Take note that China is Australia’s largest trade partner, accounting for 19.2% of all imports and more importantly, 26.4% of exports.
Speaking of trade data, recent figures have been alarming as well.
A recent report showed that Chinese imports were down 2.6% year-on-year this past August, which was the complete opposite of the predicted 3.5% rise. This is bad news for the Australian economy, as this could mean that China has too much inventory on hand and is cutting back on its orders on raw materials.
Weakness in China’s steel market has also taken its toll on the prices of iron ore and coking coal, two of Australia’s hottest exports. Over the past three months, spot prices of iron ore and coking coal have dropped a whopping 35% and 25%, respectively.
Reading the RBA minutes, I noticed two things that point to a possible rate cut in the near future.
First, Australian policymakers noted that the current inflation situation and outlook for consumer prices still give them leeway to ease monetary policy in the future in case the country’s growth outlook worsens. Words like these tell us that the thought of easing has already entered policymakers’ minds!
Also, the RBA sounded particularly bothered by the Aussie’s recent strength, saying that its high exchange rate has been affecting the economy more than it had expected. Of course, this presents another reason for the central bank to cut rates, as we know that lower interest rates would help weaken demand for the Aussie.
With all this in mind, many out there are starting to mark down October 2 (the next RBA statement) on their calendars as the day we’ll see a rate cut. According to swaps data compiled by Bloomberg, traders think there’s a 78% chance that the RBA will slash rates to 3.25% next month.
Taking a look at AUD/USD’s daily chart, we’ll see that the case for a weaker Aussie makes sense even from a technical standpoint.
AUD/USD peaked right after the FOMC statement and bounced right off the 1.0600 handle, which was a tested and proven resistance level. And since then, it’s been showing nothing but red candles. Right now, it even looks as though the pair may soon complete a double top formation.
Overall, this shows that even the announcement of QE3 hasn’t been enough to prop the Aussie higher.
But if QE3 can’t keep the Aussie from falling, what will? Aye, that’s the million dollar question right there! I don’t know about you, but it’s sort of hard for me to imagine AUD/USD coming under a lot of buying pressure with Australia facing a dimming growth outlook and a possible rate cut in the near future.