Governor Michelle Bullock addresses the media following the RBA's decision to cut interest rates. Source: RBA.
The RBA is not done cutting interest rates, and this will weigh on the Aussie.
The Reserve Bank of Australia (RBA) lowered interest rates by 25 basis points, as expected, but was more forthright in alluding to the need for further reductions.
"RBA Governor Michele Bullock did not write off back-to-back cuts, noting the RBA will look at the data and assess at each meeting," says Lee Sue Ann, an Economist at UOB. "We anticipate further rate cuts ahead."
Markets adjusted for further cuts by selling the Australian Dollar, which is down against all its G10 peers on Tuesday.
The Pound to Australian Dollar exchange rate is higher by a third of a per cent on the day at 2.0714. The Euro-to-Aussie is at 1.7887 and the Aussie-to-U.S. Dollar conversion is at 0.6494.
The prospect of further interest rate reductions will limit the AUD's upside potential, say analysts.
"This dynamic makes the pair unattractive to long-term carry traders due to the low yield spread, which is unsuitable for medium-term speculators due to the lack of a clear trend, but it makes AUDUSD attractive for range trading," says Alex Kuptsikevich, chief market analyst at FX Pro.
Carry is where investors borrow at low interest rates and invest the capital in higher interest rate products. It is a significant driver of currency movement and Australia's carry advantage was so potent during the 2010s that it helped AUD reach parity against the U.S. Dollar.
Above: AUD is down against all major peers post-RBA decision.
The RBA cut its base rate by 25 basis points to 3.60%, which ensures Australia's base rate is below that of the UK's and that of the U.S.
The cut was premised on the assessment inflation is moving in line with expectations, falling to 2.7% y/y on a trimmed mean basis and 2.1% on a headline basis.
The Bank's economists predict inflation will remain close to the centre of the 2-3% target range. The cut was also justified on the basis of soft business surveys, rising unemployment and slowing wage growth.
The Bank's forecasts show lower GDP growth across the forecast horizon compared to the May assessment, largely on account of a downgrade to Australia's productivity forecast. The RBA sees labour productivity growth at 0.7% y/y by the end of the forecast horizon, down from 1.0% y/y previously.
The forecasts are based on a slightly lower assumed cash rate path compared to May, with two more rate cuts assumed by early 2026 based on market pricing.
The unemployment rate outlook is the same as in May, but the wage growth outlook is marginally softer, at 2.9% y/y in December 2026 versus a previous forecast of 3.0% y/y.
These forecast changes clear the path for further rate reductions and have duly raised the odds of a September interest rate cuts to 34%, while a November rate cut is 100% nailed to the mast.
This is a dovish turn from the RBA, and the AUD is weaker as a result. All eyes now turn to Thursday's labour market statistics.