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Tough Week for Australian Dollar as RBA Disappoints on Growth, Interest Rates

Further losses on Friday cemented the Australian dollar’s status as the week’s worst performing major currency. Depreciation has been driven by Australia's central bank, which has slashed forecasts for 2019/20 economic growth and signaled it could lower interest rates.

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Following a third consecutive day of losses, the Australian dollar ended the week worth only 70.8 US cents, more than 2 percent lower than Monday’s opening rate of 72.5 US cents.

The Aussie was sold widely again on Friday in the hours leading up to and following the Reserve Bank of Australia’s Statement on Monetary Policy, in which growth and inflation forecasts were cut significantly. By all accounts, the RBA is becoming increasingly concerned about Australia’s property market, especially in Sydney and Melbourne where prices have fallen 10 percent over the past year.

Economic growth in Australia is now forecast by the RBA to reach only 2.5 percent (annualized) by the middle of this year—a significant cut to November’s prediction for growth of 3.25 percent. Inflation forecasts, too, were slashed: inflation is likely to reach only 1.25 percent come the end of June, having been predicted in November at 2.0 percent. Mid-2020 forecasts were also lowered.

AUD to USD - 3 month chart to 08 Feb
AUD/USD - 3 month chart to 08 Feb

Some downward revisions had been expected, especially following Wednesday’s statement by RBA Governor Philip Lowe, who stunned FX traders when he said that the chances of an interest rate cut were now “evenly balanced” with those of a hike, but the extent of the revisions was a shock.

“The magnitude [of revisions] is a bit larger than one would have thought,” JP Morgan analyst Ben Jarman told The Australian. “It is hard to read this as anything less than a capitulation on the RBA’s long-held view that the economy is improving and that the consumer can withstand headwinds from housing and wealth effects.”

With a near-100 percent chance of a 2019 reduction in Australian interest rates now priced in, the medium-term outlook for the Australian dollar is hardly rosy. Researchers have already made sweeping cuts to currency forecasts: Capital Economics now sees AUD/USD falling by year-end to a miserable 60 US cents.

Adding to the Aussie’s woes this week was news that US President Trump has ruled out meeting with Chinese President Xi this month to discuss a resolution to an ongoing trade dispute. Trump has previously said he will increase tariffs on US$200 billion worth of Chinese goods to 25 percent, from 10 percent, if a trade agreement with China is not reached by March-1. To do so would be to strike a huge blow to global trade, upon which the Australian economy relies.

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