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By Chris Tedder, Research Analyst, Forex.com

The RBA returned to the policy table today, where it decided to leave the official cash rate unchanged. The market had largely priced in the decision by the bank, thus the initial reaction from the aussie was somewhat muted, although the accompanying statement by Governor Stevens resulted in a small sell-off in the commodity currency. AUDUSD was sent sliding towards 1.0395, but didn’t have the momentum to push through a significant support zone around this level, which happens to correspond with the pair’s 100day SMA.

The market’s bearish reaction to the statement can be attributed to a slightly more dovish than expected statement from the bank, with the RBA stating that the inflation outlook provides scope for more rate cuts if needed to stimulate demand. The bank also highlighted some weakness in non-resources parts of the economy, as well as an unexpectedly high aussie dollar.

However, the board acknowledged that the outlook for the global economy had improved since they last met, underpinned by a turnaround in investor sentiment. Perhaps the part of the global economy that is showing the most promise is Asia, led by a turnaround in Chinese growth. This has helped to push some commodity prices higher over the last few months, including a rebound in the price of iron ore, Australia’s largest export.

Overall, the statement from Stevens suggests the bank wants to fully assess the impact of last year’s extreme monetary policy loosening before deciding on a concrete course of action. However, the RBA has made it clear that it has both the will and ability to cut the official cash rate at a later date if it deems it necessary to boost demand. Whilst we acknowledge the recent positive stgelopments offshore, if the Australian economy remains somewhat subdued then we may see more rate cuts. On the other hand, if the RBA’s previous monetary policy loosening finds its way into the real economy, especially business confidence, then we may see the bank start to lose its dovish tone.

At present, however, the RBA continues to softly hint at the possibility of future rate cuts, which may cap any significant gains for AUDUSD in the near-term, possibly to a maximum of 1.0600. Thus, we may see some downside for the pair below this level. In particular, we are watching for support around 1.0375 and 1.0325.

 

Source: Forex.com