The RBA vs FOMC in a Race to the Bottom: AUD/USD

Posted Saturday, June 8, 2019 by
Rowan Crosby • 2 min read

Two opposing central banks began to collide this week as both the RBA and FOMC appear to be at the crossroads.

The RBA made the first big step in many years and cut the cash rate by 25bp to 1.25%. Shortly thereafter, Governor Lowe came out and suggested there might be more cuts on the way. His goals appear to have changed slightly in recent times. His primary role as RBA boss is to keep inflation in check. At the moment, inflation continues to lag the 2-3% target band and has done so for some time.

Governor Lowe has since turned his attention to using monetary policy to lift both and jobs and wages. The heartbeat of the economy. Lowe would like to see unemployment fall from where it currently sits at 5.2%, down to the low-4s. At the same time, he would also like sluggish wage growth to pick up. Both measures would then stimulate the economy and lift inflation.

It is also important to note that exports make up a huge portion of Australia’s GDP. Particularly commodities such as iron ore and coal. The vast majority of commodities are priced in USD and that means a weak AUD/USD is a positive for exporters. They will receive more money for the same level of exports when the exchange rate falls.

The AUD’s response to this weeks rate cut might even be a bigger concern for Governor Lowe. The Aussie rallied when by most opinions it should have fallen.

The markets already pricing in a rate cut could be one reason for this. The other cause was the weak USD. The US Dollar Index has tumbled from 98.00 to where it sits currently around 96.50. US Fed boss Jerome Powell prompted the move, suggesting further rate cuts could happen this year if required.


The Jobs Fallout

On Friday, another significant piece of the puzzle fell into place. The US non-farm payroll number came in at a disappointing 75K for the May. The number was expected to be 185k, which is a significant miss. The jobs situation in the US has been very strong of recent times and has been a real shining light. That suggests this number was a bit of a red flag to many.

The failure to put up a strong number opens the door for Powel and Co. to cut official rates, at least in the short-term. If that comes to be, then we have to expect some downside in the Greenback. That will continue to prop up the AUD/USD, which is sitting perilously close to the 0.7000 level. As yet it has been unable to breach that resistance level in any meaningful way, despite its best attempts on Friday.

At this point in time, it is unclear as to which central bank will win the battle of the rate cuts. If anything I feel there is more room for the RBA to cut and the FOMC seems to be looking to do so only begrudgingly.

Bottom Line: I still remain bearish on the AUD/USD and bullish on the Greenback longer-term. Given Friday’s developments, I wouldn’t be surprised to see the Aussie push towards the 0.7050 level over the course of the week.

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