RBA Remains on Hold while Citing More Concern over China Slowdown

The most significant overnight market mover was the Australian dollar, which experienced a substantial depreciation against the US dollar, declining by slightly more than 1%. Consequently, the AUD/USD exchange rate retreated below the 0.6400 level. This decline in the Australian dollar can be attributed to two primary factors: the Reserve Bank of Australia's (RBA) recent policy update and concerns about China's economic growth.

During its latest policy meeting, the RBA opted to maintain the policy rate at 4.10%, marking the third consecutive month of unchanged rates. This decision occurred just before the impending transition of RBA Governor Philip Lowe to Deputy Governor Michele Bullock, scheduled for September 18th. While this decision to keep rates steady reaffirmed market expectations that the RBA has likely reached the end of its hiking cycle, the RBA's guidance still indicated their readiness to raise rates if necessary. The RBA emphasized that any further tightening would depend on incoming data and evolving risk assessments.

Currently, the Australian rate market is pricing in approximately 8 basis points of rate hikes by year-end, followed by a 25-basis point rate cut by the end of the next year. The decision to maintain rates aligns with market predictions, especially considering recent data, including lower-than-anticipated inflation figures for July, which reduced pressure on the RBA to pursue further rate hikes.

Regarding the RBA's future approach under incoming Governor Bullock, the central bank will continue to rely on data-driven decision-making. Bullock emphasized that monetary policy choices will be made monthly, guided by economic data. The RBA's updated policy statement expressed confidence that recent data trends align with the goal of bringing inflation back within the 2-3% target range. However, lingering concerns persist, particularly regarding the potential persistence of services price inflation, both domestically and abroad. Additionally, the RBA acknowledged uncertainties surrounding the lag effects of monetary policy and the responses of firms' pricing decisions and wages in the context of slower economic growth, despite a tight labour market. These factors suggest that the RBA has not completely ruled out the possibility of future rate hikes, despite maintaining the status quo in recent policy meetings.

A notable aspect emphasized in the policy statement is the "increased uncertainty surrounding the outlook for the Chinese economy due to ongoing stresses in the property market." The loss of growth momentum in China has garnered significant attention in the market and contributed to the Australian dollar's weakness, pushing the AUD/USD exchange rate to a year-to-date low last month at 0.6365. Key support levels lie between 0.6200 and 0.6400, reflecting lows from the autumn of 2022. In the near term, investor sentiment toward China is poised to remain the primary driver of the Australian dollar's performance. The recent depreciation of the Aussie may persist if China's policymakers' stimulus measures fail to stabilize or improve investor sentiment throughout the remainder of the year. 

CHINA GROWTH CONCERNS HAVE BEEN WEIGHING DOWN ON AUD

Source: Bloomberg, Macrobond & MUFG GMR

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