Above: RBA Governor Michelle Bullock.
AUD is under pressure after an unexpected set of RBA meeting minutes.
The minutes for the May meeting - at which the Reserve Bank of Australia (RBA) cut interest rates by 25 basis points - were unexpectedly 'dovish', in that they signpost the potential for more cuts in the future than markets assumed.
"AUD/USD fell by 0.4% towards 0.6470," says Samara Hammoud, FX Strategist at Commonwealth Bank of Australia. "The RBA minutes for the 20 May meeting noted a cut was justified on domestic conditions alone, given underlying inflation is back in the target band and soft private consumption."
For the RBA, this domestic outlook, when combined with rising global uncertainties, validated the discussion of cutting by 50 basis points.
"Members noted that a reduction in the cash rate could be warranted on the basis of either domestic or global factors, and that the combination of these might therefore warrant a 50 basis point reduction at this meeting," read the minutes.
News that a 50bp was on the cards is a surprise for a market that anticipated the RBA would be nervous to move too fast, opting instead for a more pedestrian run-rate of 25bp cuts.
"Global uncertainty amplified the discussion about a 50bp cut," says Hammoud.
Above: GBP/AUD at daily intervals. Annotations were drawn on Monday, June 03 in our GBP/AUD Week Ahead Forecast, which anticipated a recovery.
The RBA has been late to the global race to cut interest rates, having raised them less than most peers in the first place. However, the tone is changing at the RBA, which is appearing far more accommodative and willing to support the domestic economy via lower interest rates.
For the Australian Dollar, a central bank that errs on the side of accommodation poses a headwind.
The Pound to Australian Dollar exchange rate (GBP/AUD) is down half a per cent on the day at 2.0957, the AUD/USD is at 0.6457 and EUR/AUD is at 1.7697.
The RBA is clearly now less concerned about inflation, as it said it "welcomed" the broad-based easing in underlying inflation.
These outcomes provided "welcome confirmation" that upside inflationary risks had not crystallised.
"Contrary to the Governor’s comments in the media conference downplaying the use of shorter-run calculations, the minutes highlighted that on a six-month-annualised basis, trimmed mean inflation was in the middle of the RBA’s 2–3% target range," explains Luci Ellis, Chief Economist at Westpac Group.
Ellis notes that the RBA expects underlying inflation to be around the midpoint of the target range.
"For a 0.1ppt revision to the forecast relative to the February round, this is a significant change in language. The determination to get exactly to 2.5% declared in the wake of the February meeting, to maximise the chance of being in the target range, was nowhere to be seen in any of the communication after the May meeting," says Ellis.
The FX market reaction shows investors recognise this shift in tone as a signal that more rate cuts are incoming.
This, when combined with a potential rise in market volatility owing to fresh tariff war fears, will likely keep AUD pressured.