With the Reserve Bank of Australia (RBA) poised to announce another interest rate cut. This important decision will become clear at their next meeting on May 20. Indeed, analysts have baked in a 25-basis-point cut completely, with increased trade frictions over the past few weeks mostly to blame for this. The expected rate increase would increase support for the Australian dollar. This effect will be particularly pronounced if Beijing were to roll out major stimulus packages.
As geopolitical tensions between the United States and China escalate, the US dollar is facing additional pressures. Market participants are intensely tracking these market-moving developments which threaten to upend existing trade dynamics and currency valuations. Here’s how the confluence of all three of these factors are dramatically changing the outlook for both currencies and central bank policies.
RBA’s Upcoming Decision
That’s why the RBA has chosen to cut rates. This decision comes in response to a number of other underlying economic indicators that point to an obvious need for stimulus. Economic growth has recently started to show cracks, forcing the bank to take a second look and shift its monetary policy again. The May 20 meeting will be the test. During this meeting, the RBA is poised to reaffirm a 25-basis-point reduction, indicating its resolve to stand behind the Australian economy.
In fact, market analysts across the globe have cautioned that this expected rate cut has already been fully priced in by investors. Moreover, the recent escalation in trade tensions — especially those between the US and China — have introduced a sense of urgency into the RBA’s discussions. As trade frictions deepen, more and more economists are raising alarm bells. So they claim the central bank has run out of options and needs to loosen monetary policy to spur growth.
Coupled with the expected rate cut, there are all sorts of predictions about massive fiscal stimulus coming from Beijing. Such measures would certainly deliver an immediate lull to the Australian dollar. If China implements substantial economic stimulus, it could lead to increased demand for Australian exports, further enhancing the currency’s value.
Impact on the Australian Dollar
Indeed, Aus dollar looks like one of the bigger beneficiaries to any major stimulus news coming out of Beijing. Because, historically, there’s been a really solid relationship between how well China’s doing and how well Australia’s doing – especially in our export-driven economy. As China’s government tries to stimulate its cooling economy through fiscal stimulus, Australia may be well-positioned to benefit.
A subtly weaker US dollar – even as US-China trade skirmishes sizzle to extreme lengths – is an important backdrop to currency markets. As long as the US dollar is offered, this is a favourable environment for other currencies, including the Aussie. This new dynamic bodes well for Australia too, particularly if the RBA’s anticipated rate cut is matched by some positive changes in Chinese economic policy.
Market watchers have emphasized that any positive news regarding Chinese stimulus could lead to significant appreciation of the Australian dollar. Improved investor confidence is fuelling this response. Improved economic prospects in Australia’s export sector have increased the outlook.
US Dollar Under Pressure
The greenback remains under pressure as tensions between the US and China keep escalating. The prolonged war has created volatility in international markets, forcing investors to search for more stable assets. As a result, the US dollar continues to be offered as traders liquidate or reassess positions for the upcoming and rapidly changing geopolitical situation.
Escalating hostilities grip all of market participants with concern. They are especially interested in how these new developments will impact the Federal Reserve’s guidance on future monetary policy decisions. Investors are particularly attentive to signals that may indicate a shift in interest rates or other monetary measures from US authorities.
The reactionary ripple effect from all these trade disputes has yet to be seen, but could cause even more volatility in currency values. Today’s traders are treading that same rocky ground. The US dollar’s performance will be most sensitive to news on the trade negotiation front and external releases of economic data.