Yesterday, the Reserve Bank of Australia (RBA) released its monetary policy decision, which caused the Australian dollar to decline. This was because the bank’s statement sounded more dovish than traders had expected. The officials spent most of the time talking about how weak the economy is.
Today, the Australian government released a report which showed that the economy was not doing as good as expected. In the fourth quarter, the economy expanded by 2.3%, which was a lower number than the 2.5% that traders were expecting. This slowdown was caused by the low capital investments by companies in the country.
Another reason why the economy has slowed down is that the Chinese economy too is cooling down. This is an important point because of the role China plays in the Australian economy. More than a third of all Australia’s exports go to China. These include products like iron ore, which is used in the manufacture of steel, and minerals like copper and aluminum. Therefore, when the Chinese economy slows down, it usually affects the demand of the products from Australia.
The economy has also slowed down because of the prolonged drought that has affected the country. This drought has led to the government diverting resources to address it. Another reason is that the housing market has continued to cool in Melbourne and Sydney. This has ended a major bull run in the housing market that saw prices rise by more than 50%. This led to many Australians borrowing heavily to invest in the sector. These investments have now gone sour.
Therefore, investors believe that the central bank could hold rates as they are for a longer time. Alternatively, they believe that the bank could lower rates, with the goal of stimulating the export market. The low interest rates help reduce the defaults by corporates and households. The only silver lining in the situation is that United States and China are close to making a deal, that may stimulate demand in China.
After the data was released, the AUD/USD pair declined to 0.7030, which was the lowest level since January this year. This level is below the near-term moving averages while the relative strength index has declined to below 30. There is a likelihood that the pair continues moving lower: to below the 0.7000 level.
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