Australian Dollar (AUD) Exchange Rate Weaker before RBA Decision. More Declines Ahead?

The Australian Dollar broadly gained following the People’s Bank of China’s decision to cut interest rates. This sign of additional easing in Australia’s largest trading partner gave the ‘Aussie’ a boost, as did an increase in China’s non-manufacturing PMI. The gauge of the services sector improved from 53.7 to 53.9 in February. The non-HSBC manufacturing index also increased from 49.8 to 49.9. However, the ‘Aussie’ went on to trim gains against peers like the Pound, Euro and US Dollar after the AiG Performance of Manufacturing Index dropped from 49.0 to 45.4 – moving further away from the 50 mark separating growth from contraction. This marked the third month of contraction and caused AiG to comment; ‘Despite the pick up in residential building over the past year, the sharp drop in mining construction, the progressive closure of automotive assembly, and weak local business investment, are weighing on demand for locally made machinery and components.’

Demand for the South Pacific ‘Aussie’ was also limited ahead of the upcoming Reserve Bank of Australia interest rate decision. The RBA shocked markets by issuing an unexpected interest rate cut at its last gathering, and many investors are anticipating another cut this month. If the central bank does indeed slash the benchmark interest rate by 0.25 basis points, as projected, the Australian Dollar could tumble. According to Westpac currency strategist Robert Rennie; ‘The main areas of strength, however, seem to be isolated towards the rate sensitive sectors of the economy – retail sales, consumer confidence and housing data – over the last month or so. To be sure, this is a sign that suggests that the February rate cut was well received; however, the key question the RBA will have to weigh up was whether one rate cut was enough to shore up and overall improvement in the Australian economy.’

As it stands, the GBP/AUD exchange rate is trading in the region of 1.9773 while the USD/AUD pairing is trading in the region of 1.2835. Australian reports to be aware of this week include the nation’s Building Approvals and Consumer Confidence data. Australian Dollar movement is also likely to follow the publication of the US non-farm payrolls report on Friday.