Above: File image of RBA Governor Philip Lowe. Photo Source: RBA on Flickr, reproduced with permission from the RBA press office.

- December 2019 rate cut now unlikely

- AUD extends multi-week recovery

- But challenging domestic growth in 2020 likely to see RBA cut again

The Reserve Bank of Australia (RBA) was the focus of foreign exchange market attention on Tuesday after policy makers in Sydney opted to keep the basic interest rate at 0.75% in their November meeting having cut rates by 25 basis points at each of the June, July and October meetings.

The decision to keep rates unchanged put a fresh bid under the Aussie Dollar which has been appreciating for weeks now.

The decision came as little surprise to a market that was expecting the Bank to keep settings unchanged; what was always going to matter was the guidance offered on future interest rate moves.

"A new sentence appeared at the start of the final paragraph that supports our view that a rate cut in December is unlikely," says David Plank at ANZ Bank.

This guidance that a December rate cut is unlikely appears to be what markets have latched onto, it appears the Bank is happy to keep interest rates unchanged owing to some slight improvements in the domestic economy as well as the global trade picture.

The rule-of-thumb is that when a central bank cuts interest rates the currency it issues tends to fall in value. Therefore, delaying interest rate cuts, as is the case with the RBA, is deemed to be supportive of the currency.

The pushing back of a December rate cut is the story here.

The Australian Dollar is outperforming its peers as a result, the currency is recording gains against all its competitors in the G10 space:

The Pound-to-Australian Dollar is trading lower at 1.8656, as the trend lower that has been in place since mid-October extends. Back on October 16 the exchange rate traded a multi-week high at 1.9093.

The Australia-to-U.S. Dollar exchange rate is quoted at 0.6914, as a period of appreciation in place since the start of October extends. On October 1 AUD/USD was as low as 0.6670.

The RBA have communicated that the interest rates they have already delivered in 2019 are doing the job of supporting economic activity in Australia:

"The easing of monetary policy since June is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. Given global developments and the evidence of the spare capacity in the Australian economy, 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 RBA has clearly attempted to cool expectations for an interest rate cut to be delivered by year-end, and this should prove supportive of the Aussie Dollar in the near-term. We would expect the currency to remain supported particularly if the growing optimism surrounding U.S.-China trade talks continue.

However, analysts are not entirely convinced today's RBA decision marks the end of the interest rate easing cycle, noting that the Bank ultimately maintained a bias towards further rate cuts in its statement:

"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."

"We think disappointment on growth and the labour market will bring the RBA back to the easing table in 2020," says ANZ's David Plank.

"We continue to expect another rate cut in February 2020," says Besa Deda, Chief Economist at St.George Bank in Sydney. "The RBA has maintained an easing bias, declaring in the final paragraph of its accompanying statement that it is prepared to ease monetary policy further if needed."

Deda says the RBA's communication has "only sprinkles of optimism" centred around housing prices and the global economy.

The economist notes caution must be exercised with regards to the uncertainty around the drought and downturn in the housing construction cycle adding to their ongoing concerns. "Uncertainty about the consumer-spending outlook continues to be singled out," says Deda.

"We remain of the view that further RBA monetary easing will be required and is likely," says Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital.

"Growth is still likely to remain subdued and below trend for longer than the RBA is allowing. This will keep unemployment higher for longer and wages growth and inflation below target for longer. Consequently, more easing will be required to achieve full employment and clear progress to the inflation target," says Oliver.

If further interest rate cuts are coming, it could well be the case that further Australian Dollar weakness has been delayed.

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