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- AUD vies with GBP for bottom of major currency barrel Tuesday.

- After RBA says it'll "reassess" AU economic outlook in February.

- Notes turning point in economy but floats concerns about wages.

- Subpar wage growth scuppering inflation's return to target level.

- AUD will be sensitive to data disappointments in months ahead.

- As market weighs prospect of Feb rate cut, RBA QE next year.

The Australian Dollar was vying with Pound Sterling for the bottom of the major currency barrel on Tuesday after minutes of the latest Reserve Bank of Australia (RBA) meeting prompted markets to again weigh the prospect of further interest rate cuts and a possible quantitative easing (QE) program coming next year.

Australian growth has continued at a "moderate pace" since the middle of the year, RBA rate setters observed before opting to leave the cash rate unchanged at 0.75% in December, minutes of the meeting revealed Tuesday.

“The RBA still has an easing bias, judging by the Minutes of their last meeting,” says Kit Juckes, chief FX strategist at Societe Generale.

The "gentle turning point" reached by the economy was still evident to RBA rate setters this month even if they appeared to be becoming more frustrated with the subpar level of Australian wage growth, which is part of the reason behind the bank's earlier decision to cut the cash rate three times this year.

Policymakers agreed wage growth was "not consistent" in the recent quarter with inflation returning sustainably to the target range and "nor was it consistent" with household spending picking back up to its "trend" level.

They noted that a deterioration in the outlook for jobs, wages and the economy would be concerning before deciding to wait until the New Year before reassessing the Australian economic and inflation outlooks.

Above: Australian Dollar performance Vs major rivals Tuesday. Source: Pound Sterling Live.

“Part of the weakness in AUD is from the RBA overnight, in which the minutes from the recent meeting point to a policy review at the February meeting and the discussion of having further room to cut rates took short Australian rates sharply lower,” says John Hardy, chief FX strategist at Saxo Bank. "AUDUSD looks downright bearish, and will look even more so on a run below 0.6825-00."

The implication from the minutes is that the RBA could respond with another rate cut at its next meeting in February to any intervening weakness in Australian economic numbers. It might even do so without such weakness, if analyst forecasts are correct.

Major Australian lenders including Westpac, Commonwealth Bank of Australia and NAB all forecast another rate cut from the RBA in February, while all have warned that the bank could find itself at least seriously considerating the launch of a quantitative easing program in the second half of 2020.

Above: AUD/USD rate shown at daily intervals.

A February rate could might come as a blow to the Aussie because with the Federal Reserve having signalled strongly that it doesn’t intend to cut U.S. interest rates again in the near future, the gap between Aussie and American interest rates would widen and further incentivise investors into selling the Australian Dollar and buying the U.S. greenback instead. Even at the Aussie’s weakest point, the interest rate differential was no wider than 100 basis points but that would increase to 125 basis points if the RBA cuts the cash rate to 0.5% and the Fed leaves its own rate unchanged at 1.75%.

That could weigh on the AUD/USD rate, which would lift the Pound-to-Aussie rate unless there was a simultaneous and matching decline in the GBP/USD rate. However, there are many other factors that will also help determine the trajectory of those three exchange rates over the coming months.

“Australian economic growth is expected to remain below trend and fall short of the RBA’s forecasts. We expect that the RBA will ease monetary policy further in 2020,” says Janu Chan, a senior economist at St George Bank. “Risks for the Australian dollar continue to be skewed towards the downside. While a “phase-one” deal between the US and China has given investors hope that trade tensions are thawing, global growth prospects remain mixed.”

Above: Pound-to-Australian-Dollar rate shown at 4-hour intervals.

The Australian Dollar was quoted lower against all of its major rivals other than Pound Sterling around noon on Tuesday as the Aussie vied with its British rival for the bottom of the currency market barrel.

Pound Sterling weakened sharply early in the morning session as investors reacted with dismay to reports suggesting Prime Minister Boris Johnson intends to construct a new 'no deal' Brexit cliff edge that will sit at the end of the 2020 year. Strategists at Commonwealth Bank of Australia said this may have played a role in engineering the Australian Dollar's Tuesday falls.

Johnson reportedly plans to enshrine the end of 2020 into law as the end of the next phase in the Brexit negotiations and the 'transition' period the UK will enter once the withdrawal agreement is ratified and the country formally leaves the EU on January 31, ITV News reported late Monday. In other words, the PM intends to make year-end 2020 the date 'Brexit' takes place irrespective of whether future trade arrangements have been agreed.

"NZD/USD and AUD/USD fell early during the European trading session on renewed Brexit‑related uncertainty," says Elias Haddad, a strategist at CBA. "The next important support levels for AUD/USD are offered at 0.6839 (the 40‑day moving average) and 0.6800."

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

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