Image © Adobe Images

- AUD slips after RBA says low interest rates are here to stay.

- Leaves door open for more cuts, subject to growth outlook.

- September's Q2 GDP figures a key moment for AUD outlook.

- MUFG says rate outlook leaves AUD vulnerable to losses.

- Commerzbankexits AUD short but warns lower levels ahead.

The Australian Dollar retreated further from last week's highs Thursday after comments made by Reserve Bank of Australia (RBA) Governor Philip Lowe were perceived as leaving the Antipodean unit vulnerable to fresh losses in the months ahead.

Governor Philip Lowe said Thursday during a speech at the Anika Foundation that regardless of whether further interest rate cuts are eventually required from the bank, Australian borrowing costs face a protracted period of time at present or lower levels.

The bank cut its cash rate to a new record low of 1% in July, after slashing it from 1.5% to 1.25% back in June in response to years of below-target inflation but more cuts cannot yet be ruled out. Lowe said in his address it still remains to be seen whether Australian GDP growth will pick up enough to eat away at Australia's spare "supply capacity" and lift inflation.

"But if demand growth is not sufficient, the Board is prepared to provide additional support by easing monetary policy further. However, as I have discussed on other occasions, other arms of public policy could also play a role in this scenario. Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates," Lowe says.

Above: Australian inflation relative to Reserve Bank of Australia target.

Australia's Dollar had enjoyed a six-week rally into the current week as financial markets bet the U.S. Federal Reserve will cut its interest rate this month, which would put an end to runaway increases in U.S. bond yields over and above those of Australia. Those yield dynamics have seen speculative money eschew Australia in favour of the higher yielding U.S. Dollar over the last year, although the Aussie was also supported by perceptions the RBA might decide to wait a while before cutting rates again.

Changes in interest rates are normally only made in response to movements in inflation but price pressures are sensitive to GDP growth, which itself depends on many things including job creation, household spending growth and international trade. Rate cuts impact currencies because of theinfluence they have over capital flows.

Those flows tend to move in the direction of the most advantageous or improving returns, with a threat of lower rates normally seeing investors driven out of and deterred away from a currency. Rising rates have the opposite effect.

"The comments signal clearly that low rates in Australia are here to stay and they are likely to be lowered further in the year ahead," says Lee Hardman at MUFG. "The Australian dollar’s status as a relatively high yielding currency will continue to be eroded by RBA rate cuts. It leaves the Aussie vulnerable to further weakness especially while global growth is slowing as well."

Above: AUD/USD at daily intervals.

The Australian Dollar was quoted lower against around half of the G10 basket Thursday in response to Lowe's comments, with the AUD/USD rate down 0.13% at 0.6968 for the session and 1.19% lower for 2019.

Losses are accruing for the Aussie amid another day of gains for Sterling, which has helped the Pound-to-Australian-Dollar rate to extend its recent recovery, leaving the British currency within inches of recouping all the losses it sustained last week.

Above: Pound-to-Australian-Dollar rate at daily intervals.

Economic developments could yet force the Reserve Bank to act again sooner than it might want to.

"We are bringing forward the timing of our forecast for the next cut in the overnight cash rate by the RBA from November to October. By October, we expect that the path of the unemployment rate will be sufficiently contrary to the RBA’s plans that they will have appropriate justification to ease policy a little earlier than we had previously expected," says Bill Evans, chief economist at Westpac.

Australian GDP growth slowed sharply in the second half of 2018, much like with most other countries, as the U.S. trade war hurt the Chinese economy directly and weakened growth elsewhere by harming business confidence and crimping demand from the world's second largest economy.

Now, and with the tariff fight between the world's two largest economies not yet over, economists anticipate a continued growth deceleration. Australian GDP growth picked up a touch in first quarter of 2019, rising from 0.3% to 0.4%, but data for the second quarter is not out until September 04.

It remains to be seen what happened to Australia's economy between the beginning of April and end of June but there are plenty of indicators that have suggested growth in the Eurozone tumbled last quarter and forecasts for the U.S. economy are also increasingly bearish.

With the commodity-dependent Aussie economy often described by policymakers as "open" and highly reliant on international trade, there's little chance of Australia avoiding being caught in the crossfire of a global economic downturn if its largest trade partner, China, is also under fire.

"A range of our leading indicators – the Westpac Jobs Index and the Westpac Index of Unemployment Expectations – signal a continuation of the current slowdown in employment growth over the remainder of 2019 and into 2020. With the unemployment rate holding or drifting higher there seems little justification to delay the cut to 0.75% to November," Evans says.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

* Advertisement