The Australian Dollar is Trading on Eggshells Right Now

Right now the Australian Dollar is trading near the target set by the Reserve Bank of Australia (RBA) near $0.75. The question is, will the RBA cut rates at tomorrow’s policy meeting.

We are likely to see another rate cut sooner than later as iron ore prices have collapsed. Iron is a key export for Australia. The RBA has said they would be comfortable with the AUD/USD at 0.75 but there is a new reality on the ground. Commodity prices are tanking, especially iron ore. This means they want to see an AUD that is even lower at this point.

Iron ore fell below $50 a ton last week. This is the first time in over a decade price has been at this level. There is a supply glut and weak demand from China. Iron or export are one fifth of all the exports out of the country. There is an argument that the RBA target of 0.75 for the Australian Dollar is now over. In reality it is probably closer to $0.70. We could now see a rate cut in April or May. The last time the RBA cut rates was back in February when the slashed the prime lending rate 25 basis points to 2.25 from 2.50 percent. This is a new record low for the RBA.

With the price of iron ore falling, already 21 percent since the last RBA policy meeting, the RBA has an added incentive to pull the trigger on more monetary policy change. With growth subdued, it makes sense for another rate cut this month. We also have poor business investment and inflation is tepid, to say the least, supporting this rate cut theory.

Should the RBA pass this time, then we will get a rate cut in May. Especially since the March CPI was low. On the flip side, is the wording from the last meeting where policy makers in the RBA stated they were happy to wait a bit to get a better gauge on the economy before making a move. We should see 50 basis points in rate cuts this year out of Australia.