Aussie dead cat bounce?
As widely expected the RBA held the official cash rate steady at record low 1.5%. Nevertheless, the Aussie was better bid after the release of the statement by Governor Philip Lowe. AUD/USD rose to 0.7235 during the Asian session before quickly easing below today’s opening price of 0.7214.
Overall, the statement didn’t change much as the central bank maintained its positive view on economic growth and is forecasting growth rate a bit above 3% in 2018 and 2019. Similarly, the monetary institution remains worried about the outlook for household consumption as household income has been growing slowly, while debt levels are high. Regarding inflation, Governor Lowe maintained its forecast of 1.75% for 2018. However, inflation should pick-up in 2019 and 2020 (2.25%y/y both). Finally, the labour market outlook remains positive.
In early European session, AUD/USD resumed its debasement following a broad US dollar rally amid persistent trade war worries. The Aussie fell 0.55% to $1.1563, while the dollar index rose 0.38% to 95.50. Just like the past few weeks, geopolitical developments and trade war tensions between the US and China as well as the ongoing negotiation between the US and Canada regarding a revamp of NAFTA will remain the main drivers in the FX market. Local developments as well as domestic economic data will stay on the backburner for now.
Indian economy strong, rupee soft
Asia’s fastest growing economy, India, is in good shape. Q2’s GDP grew 8.2%, its highest pace since Q1 2015. 2018’s GDP could end up rising 7.5%, in line with the Reserve Bank of India forecasts. The Indian economy remains less dependent on external demand for growth. However, weakness in the Indian rupee weighs on the current account balance, with growing import costs and rising oil prices since the beginning of the year.
Depreciating by 12% against the greenback since the beginning of the year and trading above the 70 level, USD/INR is expected to continue its rise. The US Federal Reserve’s normalization cycle along with RBI’s moderation of its interventions in foreign exchange are pushing the USD/INR up. The monetary policy meeting on 5 October should see a 0.25% interest rate hike. Currently at 71.32, USD/INR is expected to rise, approaching the 71.40 range in the short-term.
