Aussie moves lower on interesting RBA minutes

Summary:

• RBA considered cutting rates at its meeting held earlier this month
• Australian central bank recognised negative effects of lower rates on savers and confidence
• Aussie dollar trades lower this morning with the market-based probability hovering around 30% for a cut next month

The Australian dollar is the worst performing major currency this morning after RBA minutes suggested the Antipodean central bank considered cutting interest rates at its meeting held earlier this month. At the same time, the board “recognised the negative effects of lower rates on savers and sentiment.” Moreover, the bank kept its pledge to ease monetary policy further if needed and underlined the exchange rate remained at a lower end of a range of recent times. 

What does it mean? Well, in practice the Australian central bank could be close to its effective bound in terms of interest rates per se (at most two rate hikes seem to be feasible under the current’s RBA notion). Nevertheless, given the fact that the bank has so far been unable to reach its 2-3% inflation objective one may think that some unconventional measures could be deployed in order to spur wages and economic growth. The idea of quantitative easing has already been discussed by some local pundits and the RBA as well. On the flip side, such programs were barely successful in the United States, Japan and the Eurozone when it comes to pushing prices higher, thus the RBA might be unwilling to follow in other central banks’ footsteps by purely replicating their strategy. So far, markets are pricing in another 25 bps rate cut in Australia in the first half of 2020, and given the fact that the Fed is done for the time being one may think the Aussie dollar might be under selling pressure barring a comprehensive trade agreement between the US and China.

Another rate reduction in Australia is currently seen in 2020. Source: Bloomberg