Australian Dollar US Dollar (AUD/USD) Exchange Rate Muted as RBA Cut Interest Rates to Record Low
The Reserve Bank of Australia (RBA) slashed interest rates to a record low last night but the Australian Dollar US Dollar (AUD/USD) exchange rate actually managed to close the European session higher as the US Dollar came under pressure of its own.
The reduction in the Australian cash rate (to 1.25%) marked the first cut since August 2016, and the first move rate during Philip Lowe’s tenure as Governor.
In a statement on the Monetary Policy Decision, RBA Governor Philip Lowe said:
‘Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy.
‘It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.’
However, Lowe also suggested that today’s rate cut may not be the last.
He added the RBA will ‘continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.’
While a rate cut would usually send the Australian Dollar lower, the move had been largely priced in already and demand for higher-risk assets was improved by developments in the US.
US Dollar (USD) Struggles with US Manufacturing Close to Decade Low
The Australian Dollar to US Dollar (AUD/USD) exchange rate managed to hold its own following the rate decision as investors dwelt on Monday’s US Markit manufacturing PMI.
The gauge of manufacturing output slumped to its lowest levels since September 2009 in May.
New orders fell and firms expressed the joint-lowest degree of confidence about future output growth since the data was first collected in mid-2012.
Added to this, employment within the sector rose at the slowest rate since March 2017.
Commenting on the data, Chris Williamson, Chief Business Economist at IHS Markit stated:
‘May saw US manufacturers endure the toughest month in nearly ten years, with the headline PMI down to its lowest since the height of the global financial crisis. New orders are falling at a rate not seen since 2009, causing increasing numbers of firms to cut production and employment. At current levels […] production is set to act as a further drag on GDP, with factory payroll numbers likewise in decline.
‘With future optimism sliding sharply lower in May, risks to near-term growth have shifted further to the downside.’
While this data weighed on demand for the US Dollar, USD exchange rates were also adversely affected by hints that the Federal Reserve could cut interest rates this year.
Australian Dollar US Dollar Outlook: Will a Rise in Aussie GDP Buoy AUD?
The AUD/USD exchange rate consolidated gains following the release of April’s US factory orders. Factory orders slumped -1.0% on the year, economists had forecast a -0.8% decline.
Meanwhile, looking ahead to tomorrow the Australian Dollar could rise following the release of Australian GDP data for the first quarter.
If data shows that the Australian economy expanded more than expected during the first quarter of 2019 the Australian Dollar to US Dollar (AUD/USD) exchange rate’s positive streak could continue.