AUD Strengthens on Back of RBA Decision to Maintain Rates

Alan Penny

7 May 2019

3 min read

AUD strengthens against USD and GPB

The Reserve Bank of Australia announced Tuesday morning that this month wouldn’t see any changes to interest rates. The announcement came as a relief to investors in the Australian dollar, leading to a strengthening of the currency against the majority of its peers.

Before the meeting, market sentiment was 50/50 on the possibility that the RBA would reduce rates, especially after posting weak Q1 inflation figures. Only a few analysts believed the RBA would leave the rate at 1.5 percent.

It should be noted that the RBA did state that a rate cut was still possible this year, considering high unemployment figures and weak retail numbers. Retailers experienced the worst quarter in seven years, which might prompt the RBA to cut rates further to make borrowing even cheaper.

Philip Lowe, the governor of the RBA, stated that the economy still has “spare capacity” and to meet inflation targets, it’s likely necessary to improve the situation in the labor market. Based on this conclusion, Lowe stated that the board of the RBA would be keeping a close eye on the labor market situation.

AUD Strengthens vs USD and GBP

Based on the announcement, the Australian dollar strengthened against both the USD and the GBP. Thus, the GBP/AUD rate fell by 0.4% and was trading at approximately AU$1.8658 during Tuesday’s Asian trading.

The AUD/USD hit a high for the week of $0.7048, though the AUD wasn’t able to maintain its strength and lost some of its gains during the European session. As of this writing the AUD/USD is trading at $0.7016, which still represents a gain of approximately 0.4%.

UK GDP Figures Could Lead to a Boost in the GBP

The UK will be publishing the latest GDP figures later this week. Analysts expect a growth of approximately 0.5% versus 0.2% in the previous quarter. If the figures come in according to expectations, or higher, there is a chance the pound sterling will strengthen.

However, any gains the GBP might experience will likely be limited due to the uncertainty surrounding the Brexit. Investors and firms are avoiding investing capital in the U.K. and will likely continue to do so until they know what to expect.

AUD Could Lose Ground Due to Tensions in US-China Trade Talks

The announcement that the U.S. could raise tariffs on imports from China to as high as 25% lead to significant downward movement in many markets. However, when Chinese Vice-Premier Liu He announced the talks would be going ahead, market sentiment improved.

Unfortunately, the situation is still uncertain, especially since China seems to be unwilling to completely fall in line with U.S. demands. In fact, Geng Shuang, Spokesperson for China’s Foreign Ministry, stated on Tuesday that higher tariffs wouldn’t help the situation and that he is hopeful the U.S. is willing to compromise.

The announcement led to a loss of optimism and it’s likely that these tensions will have an adverse effect on the market’s appetite for risk. There’s a good chance that decreased risk for appetite will reverse any gains the AUD has experienced at the start of this week.

There had been talk that the U.S. and China could reach an agreement this week, this is unlikely to happen at this point. It will likely take a little more time, though some analysts believe a deal will be reached because China’s economy would suffer if negotiations broke up.

Written By
Alan Penny

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