It's going to be a volatile session for the Australian dollar as a key RBA speech looms

PETER PARKS / AFP / Getty Images
  • The Australian dollar rallied across the board on Monday following the Coalition’s shock election victory over the weekend.
  • Its gains were kept in check by continued trade tensions between the United States and China along with expectations for near-term rate cuts from the RBA.
  • RBA Governor Philip Lowe will deliver a major speech on Tuesday that will likely signal whether or not the central bank will cut rates in the months ahead. Markets put the probability of a 25 basis point rate cut next month at around 70%.

The Australian dollar rallied across the board on Monday, managing to cling onto earlier gains following the Coalition’s shock election victory over the weekend.

Whether the Aussie can continue to rally will likely be determined by a speech from Reserve Bank of Australia (RBA) Governor Philip Lowe later in Tuesday’s trading session.

Here’s the scoreboard at 7am in Sydney.

AUD/USD 0.6906 , 0.0038 , 0.55%
AUD/JPY 76.01 , 0.45 , 0.60%
AUD/CNH 4.7915 , 0.0208 , 0.44%
AUD/EUR 0.6181 , 0.0028 , 0.46%
AUD/GBP 0.5426 , 0.0029 , 0.54%
AUD/NZD 1.0566 , 0.0039 , 0.37%
AUD/CAD 0.9276 , 0.0031 , 0.34%

After surging initially following the Coalition’s surprise re-election over the weekend, the AUD/USD moved in a fairly narrow range throughout much of Monday’s session, running into sellers above .6930 but finding buying support on any dips below the .6900 level.

The Aussie’s ability to push higher was inhibited by another escalation in trade tensions between the United States and China, leading to another bout of investor caution.

“Investors grew pessimistic on the prospects for a US-China trade deal,” said Belinda Allen, senior economist at the Commonwealth Bank.

“After the US White House placed Chinese telecom equipment-maker Huawei on a trade blacklist, Google suspended some business with the Chinese company. Other companies elected not to trade with Huawei until further notice.”

Along with uncertainty over the prospect of a lasting trade deal even being reached, the Aussie continues to be undermined by speculation that the RBA will cut official interest rates in the months ahead.

Australian interbank futures put the probability of a 25 basis point reduction to the cash rate next month at around 70%.

Investing.comAUD/USD Hourly Chart

In the absence of any additional headlines or tweets relating to trade tensions between the United States and China, the Aussie’s performance on Tuesday will likely be dictated by a speech from RBA Governor Philip Lowe entitled ‘The Economic Outlook and Monetary Policy’ from 1.10pm AEST.

“Our expectations are for the governor to emphasise the bank’s easing bias and pave the way for a cut in June,” said Rodrigo Catril, senior FX strategist at the National Australia Bank.

“Last week’s labour force data provided further evidence that the economy is weaker than the RBA had expected. The unemployment rate has risen from an eight-year low of 4.9% in February to 5.2% in April and although employment has remained strong, other measures point to increased spare capacity over recent months suggesting a potential for the unemployment rate to rise further.”

With markets clearly favouring the view that the RBA will cut official interest rates next month, Lowe will likely use this opportunity to either push back or indicate that rate cuts are likely in the months ahead — central bankers’ don’t usually like to create unnecessary uncertainty.

Before Lowe’s speech arrives, the minutes of the RBA’s May monetary policy meeting will also be released at 11.30am AEST. US Federal Reserve Chair Jerome Powell will also deliver a speech from 9am AEST.

On the economic data front, there’s next to nothing out in Asia, pointing to the likelihood that gyrations in the Chinese yuan will be influential on Asian currencies in the early parts of trade.

Later in the session, central bank speeches will dominate proceedings.

Charles Evans and Eric Rosengren from the US Federal Reserve’s FOMC will be in action, as will Bank of England (BoE) Governor Mark Carney.

On the data front, Eurozone consumer confidence and US Existing home sales are the only releases of note.

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