Tomorrow’s key decision from the newly appointed Governor Philip Lowe could be an important one, despite stronger than expected inflationary data last week. Some economists have predicted further cuts to its base rate of 1.5% in the weeks ahead, which could come as early as tomorrow.
But what is the likelihood that Lowe will deliver a quarter point rate cut at the next interest rate decision tomorrow? Whilst the RBA may look to weaken its currency to boost the countries exports, the Australian Dollar may find itself in a position of weakness come December anyway.
Rate hike from FED could weaken AUD
With the US elections entering its final stage the FED are looking more likely to raise interest rates early next year, with some predicting a hike as early as December. A hike in US interest rates will likely weaken commodity currencies as investors pile funds into the US Dollar, a safe-haven currency for longer term investment. The Australian Dollar could find itself naturally on the weaker side early next year which may prevent the RBA from using its ammunition.
Commodity boost may lead to stronger inflation
With the recent rebound in commodity prices as business confidence heightens around the FED hiking rates, Australian exports may benefit from the stronger prices which could benefit inflation and employment rates. The RBA may want to hold fire on further cuts and overshadow the commodity markets for the foreseeable. The other important factor is China, and given the strong Producer Price figures released last week, its likely that Australian exports will benefit from a stronger Chinese economy.
I am expecting a non-event from the RBA but I would expect a rate cut to catch markets off-guard, leading to a significant fall in AUD’s value. There remains some arguments for the RBA to cut interest rates and I would not write off the idea entirely.
If you are buying Australian Dollars this week, tomorrow could provide a surprise to the markets.