On Tuesday, the Australian dollar fell sharply against the US dollar. A combination of factors including weaker Chinese data and the RBA’s decision to hold rates the same have weighed on the Aussie. The strengthening of the greenback to over a three-month high has also added to the sharp decline.
The Australian dollar (AUD) began its descent after the release of a private survey that showed that Chinese business activity in the services sector expanded at its slowest pace in eight months. The Caixin/S&P Global Services PMI fell to 51.8 in August from 54.1 previously, igniting concerns about the deteriorating economic conditions in the world’s second-largest economy. As a result, investor sentiment weakened leading to an aggressive selling around the AUD/USD pair. RBA Governor Philip Lowe said in a statement that “there is increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.”
Reserve Bank of Australia (RBA) interest rate decision
The Australian central bank remained on hold as was widely expected, leaving the Official Cash Rate (OCR) unchanged at 4.10% for the third consecutive month. In the accompanying statement, the RBA pointed out that there may be further tightening ahead to bring inflation down, around the 2-3% target range by the middle of 2025. The bank’s dovish stance has led to speculation that the policy tightening cycle may have come to an end.
Federal Reserve (Fed) to keep interest rates higher for longer
The increasing belief that the Fed will keep interest rates higher for longer has boosted the greenback and weighed on the Aussie pair. Despite signs that labour market conditions in the US are easing, the markets are still anticipating one more 25 bps Fed rate hike by the end of this year.
What analysts have said
Analysts at TD Securities (TDS) expect the RBA to hike interest rates further. They said: “The RBA kept the cash rate on hold at 4.10% as was widely anticipated by the analyst and trading community. Of more interest for markets was the tone of the Bank’s commentary, in particular the last paragraph. As we expected, the Bank reiterated its conditional tightening bias.”
Australia’s GDP rates for Q2
All eyes will now turn towards Australia’s GDP rate due out tomorrow. Analysts expect the data to reflect subdued growth conditions, but they noted it won’t create a huge market reaction. However, a weaker print may convince markets that the RBA will likely remain on hold for the rest of the year.
Q2 GDP growth is anticipated to come in below consensus at +0.2% q/q, +1.6% y/y, but in line with the RBA’s Aug SoMP forecast. Real retail spending is expected to impact consumption and possibly subtract 0.1%-pt from quarterly GDP growth. The rise in housing market activity could help to offset the weaker growth over the quarter.