Australian dollar faces 2nd rate cut

Financial and commodity markets analytics

The Australian dollar is trading lower today as expectations mount that the RBA will cut interest rates again tomorrow for a 2nd consecutive time bringing the cash rate to a historical low of 2%.

At 7.00am (GMT) the local currency was trading at US77.61c down from US78.06c at close of trade on Friday.

Disappointing capital expenditure figures released last week increased the chance of a rate cut amongst analysts to around 55% up from 38% before the release of the news.

The number came in at -2.2% well below analysts’ expectations of a -1.6% fall and clearly shows that confidence in the business sector is fading.

Adding more evidence that a rate cut tomorrow was on the cards was Commonwealth Bank senior economist Michael Workman who noted that the Australian central Bank has a history of reducing rates in consecutive months,

 "Usually when they cut rates, they don't just do one out of the blue and stop. It's normally two," he said.

Providing some support earlier today for the Aussie dollar was the surprise decision from the Chinese Central Bank to slash interest rates in order to kick start growth in their flagging economy.

The bank said it would cut the rate by 25 basis points as part of their stimulus program to restore confidence into the business sector.

Bank of New Zealand strategist Kymberly Martin said the Aussie dollar initially spiked after the announcement before giving back the gains as traders digested the news and its effect on the Australian dollar,

 "Clearly, the Australian economy is quite closely linked to China so the initial knee-jerk reaction is that if the Chinese economy is doing better, that will be supportive for Aussie exports," Ms Martin said.

"But if you look a bit more deeply, the cut leads to a weaker yuan or signals further cuts, so the longer-term prospects are actually not supportive for the Aussie dollar."


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