The Reserve Bank of Australia is not afraid of further monetary easing
On October 1st, the RBA lowered their interest rate by 25bp. The new key interest rate is 0.75%. This is the 3rd cut this year and the lowest rate in the RBA’s history.
The tone of the statement that followed the cut was dovish. Here are some key factors from the speech delivered by Philip Lowe, Governor of the Reserve Bank of Australia:
- While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans because of the increased uncertainty.
- The Australian economy expanded by 1.4 per cent over the year to the June quarter, which was a weaker-than-expected outcome. A gentle turning point, however, appears to have been reached with economic growth a little higher over the first half of this year than over the second half of 2018.
- The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending.
- The Board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target.
- It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.
The US-China trade tensions are taking a toll on the Australian economy. China is Australia’s top destination of export, amounting to approximately 36% of all export in 2018. Australia is rich in natural resources and the Australian dollar is a commodity currency. Metalliferous ores and metal scrap account for 29% of total exports; coal, coke and briquettes for 15% and gas for 7%.
Economic data on other Australian indicators was weak in September. Retail sales MoM fell to -0.1% in July, below the forecast of 0.2% and the previous result of 0.4%.
Australia’s business confidence declined to 1 from 4 in August.
And while the Employment change rose by 34.7K, the number of full-time positions decreased by 15.5K. Therefore, the gain is due to part-time employment.
The weaker data on US ISM manufacturing PMI helped AUDUSD create a new low since 2010 at 0.66719.
US ISM manufacturing PMI came out 47.8, which is a critical level last seen during the financial crisis between 2007-2009.
On a 4HTF, the RSI is showing that the asset is in the oversold zone, and the indicator is beginning to point up.
The Base and Conversion lines of the Ichimoku Cloud are getting ready to intersect. We’ll be looking for a TK cross, Lagging Span is also starting to point up.
In our opinion, after a significant move down that followed weaker than expected data, which had created a new bottom, a correction is likely to occur. The target areas are at the level of 0.67098, followed by the resistance area between 0.67437 and 38.2% Fibo 0.67529.
The pair is sensitive to trade negotiations that are to resume on the October 7th in Washington.