Australian Dollar Weak on Interest Rate Cut Outlook

The Australian dollar was one of the weakest currencies on the Forex market during Wednesday’s trading. The Aussie fell even against its New Zealand counterpart, which itself was extremely soft, though by now the AUD/USD pair has almost erased its losses. Market analysts thought that the main reason for the currency’s weakness was the outlook for an interest rate cut in the near future.
Yesterday, Guy Debelle, Reserve Bank of Australia Deputy Governor, was delivering a speech at a virtual conference. He talked about the resilience of the Australian economy but also explained what headwinds it is facing:

Overall, the recovery has not been a rapid bounce but more of a slow grind. The virus is having its effect, particularly because of the lockdown in Victoria, but so too is the shortfall in demand that occurs in recessionary conditions. That shortfall in demand will be a significant brake on the recovery. Until households and businesses are confident about future demand and income, they will be reluctant to spend and invest.

He also explained four options the central bank considers for stimulating the economy further: buying bonds further out along the curve, foreign exchange intervention, reducing interest rates but keeping them above zero, and negative interest rates. While the Deputy Governor talked about the downsides of negative rates, analysts believe that chances for negative interest rates continue to increase, though the RBA will likely not implement them in the nearest future. Westpac predicted that the central bank will lower the overnight cash rate from 0.25% to 0.1%, the target yield for three-year bonds from 0.25% to 0.1% too, and also increase purchases of government and semi-government securities at the next meeting on October 6.
As for macroeconomic data, the IHS Markit Flash Australia Manufacturing PMI climbed from 53.6 in August to 55.5 in September, reaching the highest level in 29 months. The reading above 50.0 means that the sector is expanding and the increase shows that the pace of expansion has accelerated. The IHS Markit Flash Australia Services Business Activity Index advanced from 49.0 to exactly 50.0 — the neutral level on no change.
Meanwhile, the Australian Bureau of Statistics released a preliminary report on retail sales, which showed a drop of 4.2% in August following a 3.2% increase in the previous month. The release was a surprise as the ABS usually releases the report once a month. But it lately started to release preliminary reports for some indicators to better gauge the impact of the COVID-19 pandemic on the economy.
AUD/USD dropped from 0.7169 to 0.7111 as of 13:52 GMT today. EUR/AUD climbed from 1.6324 to 1.6432. AUD/NZD was down from 1.0805 to 1.0747 intraday but has bounced to 1.0797 by now.
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