Weak AUD cannot remain solution forever

The Reserve Bank of Australia (RBA) will not find its rate decision next week as easy as it may have expected only a short while ago. Not much is likely to have changed about its view on the domestic economy, as inflation and economy recently sent out positive signals. The AUD has also continued to fall and despite the overnight correction is approaching the 0.70 mark against USD, which suits the RBA well. 

However, the reason for the AUD weakness is likely to cause the RBA some concern. Major concerns about the Chinese economy and related risk aversion and a further collapse of commodity prices are truly worrying signs for the Australian economy. After all the positive signals for the economy and inflation can easily turn negative again. Capex for example already disappointed again this morning: in particular in the mining sector planned investment is falling considerably once again. 

The RBA is likely to stay on hold next week while it tries to get an assessment of the current situation and the future outlook, says Commerzbank. The subject China will play an important role in its statement, while the AUD will be relatively marginal. 

"If demand from China collapses further a weaker AUD will be unable to support the economy any further at some stage. AUD weakness at any expense is not the solution, so perhaps the only way out will be another rate cut this year. The chances of that happening have risen over the past few days", argues Commerzbank.