On April 7, the Reserve Bank of Australia stayed steady at 2.25% for the second month in a row, somewhat wrong-footing markets once again. Bond market participants, in turn, simply moved their rate cut expectations from April to May, seemingly without wondering or worrying about what new information would be required to catalyze a rate cut. Their assumption may be premature. Sure, there is the Federal Budget, the Statement on Monetary Policy and the CPI report to come, but we already know these will all directly support a decision to ease policy further. So, while an interest rate cut in May should remain the path of least resistance for the RBA, given the signaling from the March and April meetings, a May rate move is no slam-dunk.
If insecurity over rising house prices in Sydney was a determining factor, then it is worth considering that despite the approximate 14% year-over-year increase (through 31 March 2015), Sydney property prices measured over the same period in U.S. dollars, Chinese yuan or Hong Kong dollars have in fact fallen by approximately 4%. This is just one example of the unintended consequences of relative global policy settings and one that Australia may need to respond to via even tighter macroprudential controls.
One thing is certain: This degree of month-to-month policy uncertainty and – as a result – interest rate and currency volatility is not conducive to encouraging the non-mining and non-property sector investment that Australia desperately requires.
Given this policy backdrop combined with the reality that the Australian economy continues to weaken, accompanied by expectations the Fed will lift off from zero in 2015, our strong conviction is for continued weakness in the Australian dollar.