The Australian Dollar to US Dollar (AUD/USD) exchange rate weakened to trade in the 78 cents region on Monday, as worries over the strength of the Chinese economy were exacerbated by a surprise interest rate cut by the People’s Bank of China (PBoC) over the weekend. The Australian currency was also weakened by a strengthening US Dollar and the publication of a flat domestic business confidence report.
The surprise interest rate by the Chinese central bank increased trader concerns that growth in the world’s second largest economy and Australia’s biggest trading partner is slowing at a faster than expected rate. The rate cut was the third made in the past six months. Normally a sign of stimulus by China is seen as a positive for the Australian Dollar but this time fears over the strength of the Chinese economy outweighed any positives.
‘Fleeting optimism over the China rate cut supported the Australian Dollar briefly; for the most part it has been downhill for the ‘Aussie’ since then. Rather than rallying on the rate cut, the market took it as more confirmation that China’s economy is not doing well and that previous rate cuts were fizzers so why should this be any different?’ said economist Sean Callow.
The US Dollar meanwhile rallied following last week’s weakness as Friday’s non-farm payrolls data was seen as a positive by economists. Despite coming in weaker-than-forecast, the data did show a solid rebound from the preceding month’s poor figure. US non-farm payrolls rose by 228,000 in April, just short of market expectations. The nation’s overall unemployment rate remained at 5.4% as forecast.
Economists are now forecasting that the Australian Dollar to US Dollar exchange rate will remain trading in the region of 78 cents to 80 cents over the coming months, as they do not expect any significant movement until the Federal Reserve begins hiking interest rates.
Due to recent economic weakness in the US, the Fed is not expected to start raising interest rates until September at the earliest. After rates are hiked, the Australian Dollar is then expected to slide to the 73 cents range. The recent recovery of global commodity markets and particularly the improvement in iron ore prices is expected to keep the ‘Aussie’ strong. The Reserve Bank of Australia is also not expected to make any further interest rate cuts.
The Australian Dollar to US Dollar exchange was trading in the region of 0.7888.