Dollar steady ahead of RBA meeting

The local unit is treading water as analysts view the central bank’s decision as a tight call.

The Australian dollar was lower on Monday after weaker-than-expected Chinese factory data signalled Australia’s growth remained at risk, and traders increasingly focused on the possibility of a Reserve Bank of Australia rate cut on Tuesday.

At 5.20pm (AEST), the Australian dollar was trading at US76.12 cents, compared with US76.08 at the same time on Friday.

The official Chinese manufacturing purchasing managers’ index, a key gauge for factory activity, unexpectedly fell to 50.1 in April from 50.2 in March, the National Bureau of Statistics said on Sunday, suggesting Chinese government efforts to bolster growth with easy-credit strategies were having short-lived effects. China is Australia’s largest trading partner.

Economists are split on whether the Reserve Bank of Australia will cut interest rates for the first time in a year when its board meets Tuesday. Expectations of a rate cut have been rising following news last week of record-low core inflation in the first quarter.

ANZ economists said the central bank faced a dilemma because while inflation is weak, economic activity is solid as shown by recent business conditions surveys and labour market data.

“As a result, the call is an incredibly close one with a range of arguments on either side, and we imagine that the board meeting will be a lively one,” ANZ economists said in a research note.

First-quarter data last Wednesday showed the economy experienced its first bout of deflation since the 2008 global financial crisis. The 0.2 per cent sequential fall in consumer prices was broadly based, with core inflation year-over-year running at a record low 1.6 per cent, well below the RBA’s 2 per cent-3 per cent target band.

JP Morgan said it expected the RBA to cut official interest rates by 0.25 percentage point Tuesday and follow up with another cut of the same magnitude in August.

“Although we view this week’s decision as a close call, we expect the undershoot on the Reserve Bank of Australia’s inflation objective will outweigh the resilience in the activity data and business surveys,” JP Morgan said.

However, TD Securities said the RBA shouldn’t stoke the country’s housing market with more cuts to official interest rates.

With household debt at record levels, clearance rates reviving and Sydney house prices accelerating again, “this sector doesn’t need even more stimulus to try and achieve within-target inflation,” TD Securities said.

Another event that could swing the currency this week is the country’s federal budget, due to be released late on Tuesday.

In local data issued on Monday, a private-sector survey of Australian business sentiment retraced recent strong gains in April, but the survey’s authors at National Australia Bank said conditions remained pretty favourable overall, as the benefits of lower oil prices and earlier depreciation in the Australian dollar flowed through.

Business conditions fell by three points to plus-nine index points in April, but were above the long-run average of plus-five. The confidence index eased one point to plus-five index points in April, marginally below average. “Confidence remains crucial to the outlook, but this was still a reasonable outcome given the added uncertainties around the global economy and the upcoming Federal Budget and election,” NAB Chief Economist Alan Oster said.

Still, subdued inflation pressures in the survey, and a very weak official inflation result in the first quarter, mean the central bank has scope to cement the nonmining industry’s recovery with a rate cut Tuesday, NAB said.