Advertisement
|19 February, 2019

Australia dollar unsettled as RBA cites significant risks

Investors have decided the risk of a rate cut is now greater than a hike

People walk past the Reserve Bank of Australia (RBA) building during rainy weather in central Sydney December 1, 2009. Australia's central bank RBA raised its key cash rate by 25 basis points to 3.75 percent on Tuesday, saying three hikes in a row was a material adjustment that would help sustain economic growth.

People walk past the Reserve Bank of Australia (RBA) building during rainy weather in central Sydney December 1, 2009. Australia's central bank RBA raised its key cash rate by 25 basis points to 3.75 percent on Tuesday, saying three hikes in a row was a material adjustment that would help sustain economic growth.

REUTERS/Daniel Munoz

SYDNEY/WELLINGTON - The Australian dollar eased back on Tuesday after the country's central bank sounded a warning about weakness in the housing market that was taken as dovish for interest rates.

The Aussie dipped to $0.7121 and away from Monday's top of $0.7160, which now marks chart resistance. It now has support around $0.7110 and $0.7080.

The New Zealand dollar was steadier at $0.6848, but likewise off Monday's peak of $0.6893.

Advertisement

Minutes of the Reserve Bank of Australia's (RBA) February policy meeting showed the board saw "significant uncertainties" over the economic outlook, particularly on how sliding home prices might affect consumer spending.

This meant there could be scenarios where interest rates might go down as well as up, the minutes showed.

"Moreover, the probabilities around these scenarios were now more evenly balanced than they had been over the preceding year, when an eventual increase in the cash rate had appeared more likely," the RBA said.

Investors have decided the risk of a rate cut is now greater than a hike, and futures 0#YIB: imply around a 70 percent probability of a quarter-point easing in the 1.5 percent cash rate by year-end.

"We expect the cash rate to remain unchanged for the foreseeable future - until November 2020 at the earliest," said CBA senior economist Belinda Allen.

"However we see the risks over 2019 as tilted toward the downside as the housing market continues to adjust lower and impact the consumer."

Any softness in wages and jobs data due this week will only add to those risks, while RBA Governor Philip Lowe will be grilled on the outlook during parliamentary testimony on Friday.

The minutes showed the RBA board was also worried about the global outlook, citing a slowdown in China and heightened trade tensions.

A new round of talks between the United States and China will begin in Washington on Tuesday, with follow-up sessions at a higher level later in the week. 

Australian government bond futures inched up in the wake of the minutes, with the three-year bond contract YTTc1 rising half a tick to 98.320. The 10-year contract YTCc1 also added half a tick to 97.8700.

New Zealand government bonds slipped a touch with yields up as much as 2 basis points at the far end of the curve.

The next event likely to provide direction for the kiwi was an auction for dairy, New Zealand's main goods export, taking place in the early hours of Wednesday morning.

Futures markets predict prices will rise for the sixth auction in a row, which could provide support for the currency.

(Editing by Richard Borsuk) ((Wayne.Cole@thomsonreuters.com; 612 9321 8162; Reuters Messaging: wayne.cole.thomsonreuters.com@reuters.net))