The RBA surprised forex markets today as they cut interest rates down to 2.25%. Most economists expected the RBA to not to anything and keep interest rates at 2.50%.This continues the surprises delivered by central banks since the starts of 2015 which signals much more market manipulation by different banks which impacts forex trades for everyone. The Australian Dollar was punished by forex traders after the interest rate cut was announced which may have been the purpose of the cut altogether.
RBA Governor Stevens mentioned many times that an exchange rate between the Australian Dollar and the US Dollar at 0.7500 would represent fair value for the Australian currency and is where the RBA would feel comfortable with that rate in order to promote economic growth and job creation without a cut in interest rates. Comments out of the RBA have helped the AUDUSD correct sharply after breaking down below parity last year.
Australia is heavily dependent on its commodity sector and especially exports to China. The slowdown in China is much more severe than the Australian economy may be able to handle which has further reduced the value of the Australian Dollar. Comments from the RBA in recent months have often echoed what many believed; that the commodity slowdown has not been priced into the Australian Dollar and therefore there is more downside to be expected.
The RBA successfully talked down the Australian Dollar, but as economic data out of Australia picked up while US data came in below expectations the risk for the AUDUSD was to the upside. Just earlier today the Australian trade deficit was reported at A$436 million which was much better than the A$1,016 million reported in December. The housing market is also in better shape with an increase of 8.8% in building approvals.
Since more and more reports pointed towards faster growth in Australia and slower growth in the US the RBA wanted to get ahead of the curve to prevent a reversal of the trend they helped build which was a lower Australian Dollar in order to make exports more attractive. Today’s cut in interest rates has pushed the Australian Dollar towards levels the RBA wanted the currency to be, but forex traders should be careful as the risk now once again is to the upside.