Australian Dollar Month Outlook (1 – 3 Months)– RBA holds the line for now

The early June meeting of the RBA saw the Bank leave the policy rate steady at 2.00%, following two cuts earlier this year in February and May. In the latest policy statement, the RBA did not include any obvious easing bias, and AUD has bounced sharply as a result. What's important though,is that the Bank's more detailed projections in their most recent Statement of Monetary Policy provide a clearer suggestion that the bias for policy rates is still lower. 

The crux of that outlook continues to be the well messaged themes of lower commodity prices (iron ore up from the lows, but still down ~11% ytd) and weak business capital expenditure, and those trends have only extended over the past month. According to RBC Capital Markets, these issues as longer-term in nature, and expect that they will continue to drive sub-trend growth that will ultimately lead to further rate cuts in the wake of the RBA meeting, the forward curve is close to flat over the next year, and there likely will not be enough evidence in the coming 1-3 months to alter that pricing much. 

For AUD/USD though, the policy divergence theme should still keep pressure on the pair with the Fed approaching a hike this year. That should see short end rate spreads continue to trend in favour of USD regardless of the amount or timing of potential RBA cuts. Partly offsetting those pressures are capital inflows, as AU remains high yielding in the current global low yield environment. Nevertheless, these flows expected to be only mitigate the pressure on the currency, says RBC Capital Markets.