Australian dollar weakens ahead of rate call

The Aussie dollar was weaker today ahead of a policy meeting of the RBA on Tuesday, the outcome of which remains highly uncertain.

The Australian dollar was weaker today ahead of a policy meeting of the Reserve Bank of Australia on Tuesday, the outcome of which remains highly uncertain.

Bets on an interest-rate cut in futures markets remained around 50 per cent for most of the week. Still, rising expectations that the central bank will revise lower its forecasts for economic growth in May, nudged bets slightly more in favour of a cut.

At 5pm (AEST), the Australian dollar was trading at US78.75c, down from US79.68c late yesterday.

Bank of America Merrill Lynch said in a research note it expected interest rates to be cut on Tuesday, but said it would likely be the last cut in the current cycle.

“The bank will continue to hold an easing bias we anticipate that a 2 per cent cash rate will represent the bottom of this policy easing cycle,” it said.

Failure by the RBA to deliver a cut was expected to see the Australian dollar rally.

Shane Oliver, chief economist at AMP, said the RBA must be cautious not to allow a rising Aussie dollar to weaken the economy.

“The Reserve Bank of Australia will need to be on guard against this, though, as it would further threaten the return to reasonable economic growth,” Mr. Oliver added.

Moreover, the recent Aussie dollar bounce adds to the case for another rate cut on Tuesday and “a step up in efforts to jawbone it lower”, Mr Oliver added.

Earlier, data on house prices showed some strength in April. Still, most of the gains were confined to Sydney, which shouldn’t alarm the RBA overly, economists said.

According to Corelogic RP Data, capital city house prices rose 0.8 per cent in April from March, and by 7.9 per cent from a year earlier. Sydney prices rose 1 per cent from a month earlier and 14.5 per cent from a year earlier.

Tim Lawless, head of research at Corelogic RP Data, said a cut in interest rates in February had given the major markets of Sydney and Melbourne a boost.

“Sydney and, to a lesser extent, Melbourne housing markets have caught a second wind which is reflected in the higher rate of capital gain as well as the very strong auction results,” Mr Lawless said.