AUD/USD Risks Further Losses with RBA Expected to Stay on Hold


RBI is expected to keep key interest rates on hold in the forthcoming announcement of the review by the monetary policy committee (MPC).

While the Aussie has weakened in recent days, the bank could use this opportunity to express greater concern as to what this could mean for economic growth and inflation should it continue to strengthen. "We continue to expect the RBI to persist with its slightly hawkish pause in its Wednesday policy, from February, to err on the side of caution".

"AUD may underperform after a series of weak data releases.Inflation was also weaker than expected, which in turn should lead to continued pricing out of expectations for an RBA rate hike", says Hans Redeker, head of G10 FX strategy at Morgan Stanley. According to Gupta, the MPC will "see through" the coming jump in inflation, growth and credit in mid-2018 as they are driven by base effects. Financial markets have fully priced a 25 basis point rise by February next year.

At its first board meeting of the year, the RBA has chosen to leave the official cash rate untouched. All 23 economists polled by Bloomberg expect the cash rate will be left at 1.5%.

Underlying or core inflation - which strips out volatile items and is closely watched by the central bank - is at an annual 1.9 percent, just below the RBA's target band of 2 to 3 percent.

Governor Philip Lowe said business conditions are positive and increased public infrastructure spending was supporting the economy, but the outlook for household consumption remains uncertain.

It also has three months' grace before the next official inflation numbers are released, so may be cautious about the outlook for prices, putting the emphasis on a need for more data.

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The Australian Dollar resumed its decline during morning trading Tuesday as markets responded to the latest Reserve Bank of Australia monetary policy statement and a slump in December retail sales.

Global growth in 2017 unexpectedly turned out higher than anticipated, and the World Bank revised its growth forecast for 2018 upward, to 3.1%.

"Over the long term, we see vulnerabilities stemming from high household leverage, weak productivity growth and foreign funding needs", Redeker adds.

Inflation remains as mystifyingly subdued in Australia as it does in many other developed economies where strong, tightening labor markets strongly suggest that it ought to be higher.

The bank noted that the low level of interest rates is continuing to support the Australian economy.

Domestic and global economic developments, as well as recent price action in the bond market, have seen investment bank Morgan Stanley begin advocating that clients bet on a steep fall in the Australian Dollar relative to the Euro. Predicting forex markets is notoriously hard but with increasing signs that domestic interest rates will likely rise this year, a range of 77-83 US¢ seems reasonable.