Aussie Falls Sharply as RBA Turns Dovish

Yesterday, the Australian dollar
rose sharply after the RBA released the interest rates decision for January. In
the accompanying statement, the bank said that the economy was in a strong
position, with growth expected to remain above 3.0% this year. This made the
currency rise sharply against the other currencies, including the USD.

Today, the currency moved in the
opposite direction. In a statement, the bank brought the probability of a rate
cut. In the statement, Philip Rowe, the governor said that, ‘there are
scenarios where the next move in the cash rate is up and other scenarios where
it is down.’ He added that, ‘in the event of a sustained increased in the
unemployment rate and a lack of further progress towards the inflation
objective, lower interest rates might be appropriate at some point.’

This was a reversal from the
hawkish statement released yesterday. The Australian economy continues to face
a number of challenges. First, the country’s housing prices are falling. This
is problematic because it inhibits investments and consumption of homeowners
who see their net wealth decrease. The falling prices are mostly because of
oversupply and low demand.

Second, the country has the
second biggest household to GDP debt at 121%. The first is Switzerland, which
has a percentage of 128%. This means that increasing interest rates could have
unwanted consequences of delinquencies.

Third, the natural resources that
have supported the country for long have become more volatile. This has led to
a slowdown in capital investments by companies in the mining sector. Fourth,
the country’s inflation rate is still below the RBA’s target of 2.0%.

After the statement by RBA, the
AUD/USD pair declined sharply to 0.7145. This was the lowest level since
January 19th. It also led the RSI to decline sharply to below 21,
which is viewed as being oversold. Later today, the pair’s movement will depend
on the data from the United States.

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