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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