The Australian Dollar Rallies After the RBA Sits Still

Kate Leaman
Kate Leaman

4 February 2020

3 min read

Australian flag and coins

  • RBA keeps interest rate at 0.75%
  • This is as expected by the market
  • External pressures on Australia include wildfires, trade war, coronavirus

During the early hours of Tuesday, the Reserve Bank of Australia had an interest rate decision in which they sat still.

The interest rate remains at 0.75%, as was expected by the market. However, there were various market participants out there that were calling for a potential safety rate cut. This is due to the fact that there are a whole host of factors that are weighing on the Australian economy.

External forces impacting the AUD

Unfortunately for Australia, most of the problems that the central bank will be dealing with are not of Australia’s making. There has been a transitory effect on the economy in the form of wildfires that have caused major damage to supply chains and simple economic momentum.

most of the problems that the central bank will be dealing with are not of Australia’s making

While the wildfires are not as aggressive as they once were, the reality is that there has been a significant amount of damage. This will have to be recovered from, and that should continue to be an issue in the short term.

Furthermore, there is a slowdown in China that has been going on for some time, due to the trade war between the United States and China.

The RBA suggested there are still a lot of issues ahead to contend with, as the participants only recently agreed to the “Phase 1 deal”, which is just a start. There will be many months of negotiation ahead of both sides. This has a massive effect on Australian exports. For example, 85% of iron exports out of Australia end up in China.

The coronavirus has had an effect as well, as it has taken a sluggish Chinese economy and put it to a standstill. This is an area that will continue to cause major issues with China, and the biggest problem is that there is no way to know when the virus will be contained.

In conclusion, the RBA could very well find itself looking at rate cuts down the road. In fact, it did suggest that could be the case.

The reaction to the news

The Australian dollar has rallied to break above the 0.67 level against the US dollar as the market has found a bottom. This level has traditionally been an area that buyers come in to pick up value when it comes to the Aussie dollar. With that in mind, it looks as if the Australian dollar is going to try to have a rally going forward.

if the situation in China worsens, traders will look to sell the Aussie as a reaction almost immediately

With the Aussie having been on its back for a while, one would have to think it’s only a matter of time before the short covering ends and the longer-term downward pressure continues.

Unfortunately for the Australians, this has no signs of abating, and it will more than likely be nothing more than a relief rally for the Aussie.

Furthermore, if the situation in China worsens, traders will look to sell the Aussie as a reaction almost immediately. The Australian dollar retains its highly sensitive nature when it comes to all things China.

Kate Leaman
Written By
Kate Leaman

With over 10 years experience as a trade news writer, Kate is our FX and commodities expert. Kate is also a talented voice over artist and BBC TV presenter, mother of two and yoga fan. Read Kate's bio

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