Rate cut talk weighs on Australian dollar

The Australian dollar was weaker today amid a widening view the RBA isn’t yet done cutting interest rates.

The Australian dollar was weaker today amid a widening view the RBA isn’t yet done cutting interest rates, while strength in the US dollar and weaker commodity prices also weighed it down.

Data out today showed a big jump in consumer confidence in May, but economists said it would need to be sustained before it would begin to reshape views on the strength of the economy.

The Westpac-Melbourne Institute Index of Consumer Sentiment rose 6.4 per cent in May from April.

“This is a very strong result,” said Westpac chief economist Bill Evans.

It was the first time since February this year the sentiment index has been above 100 — the point beyond which optimists outnumber pessimists — and the highest level since January last year, he said.

the Reserve Bank lowered its cash-rate target to a record low 2 per cent on May 5, the second cut this year.

Meanwhile, Treasurer Joe Hockey announced the government’s 2015-16 budget last week, pledging a return to surpluses by the end of the decade. Mr. Hockey didn’t repeat warnings about fiscal emergencies, which marked the previous budget.

At 5.02pm (AEST), the Australian dollar was trading at US78.94c, compared with US79.73c at the same time yesterday.

John Kicklighter, chief currency strategist at FXCM, said comments by the RBA yesterday that it had scope to cut rates if necessary took some steam out of the Australian dollar.

“The RBA minutes proved to be an effective short-term mover for the Australian dollar, but the threat of further easing wasn’t worthy of a persistent trend,” he said.

“Keeping the door open to further rate cuts and bemoaning a still-high currency are common enough rhetoric that the market treats it with passing interest,” he said.

Swap markets are pricing in the possibility of a further rate cut by the RBA over the coming year, “but conviction in a full-blown dovish regime has certainly throttled back,” he said.

Iron-ore prices, which have dropped over the past six trading days, also dragged on the Australian dollar.