More Rate Cuts in Australia? Here’s Why Not
The fact that the Australian dollar has fallen more than 8 percent against the U.S. dollar from an April high could be reason enough for the Reserve Bank of Australia (RBA) not to cut interest rates again this year, say strategists.
"The RBA's biggest concern recently has been that the Aussie dollar has been as high as it has been, so some depreciation of the Aussie dollar is going to make the RBA feel a lot more comfortable," Paul Bloxham, chief economist for Australia and New Zealand Bank told CNBC Asia's "Squawk Box."
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Up until, two weeks ago the Aussie dollar had held firmly above parity with the greenback before being knocked down by a broadly robust U.S. dollar, a fall in commodity prices and signs of weakness in China – Australia's biggest trading partner.
Bloxham said the recent weakness in the Australian dollar was a reason why he believed the RBA was done with cutting interest rates this year.
The RBA has slashed its key borrowing rate by 200 basis points since late 2011 to bolster its economy from weaker global growth, a slowdown in mining sector investment and a strong currency that has hurt exporters.
Economists say the central bank is nearing the end of its monetary easing cycle amid signs that the lower borrowing rates are supporting the economy and a slide in the Aussie dollar makes a compelling case for no further easing.
Australia's currency has fallen about 5.6 percent since the RBA cut rates by a quarter of a percent to a record low of 2.75 percent on May 7. It hovered around $0.96 on Tuesday, within sight of an 11-month low hit last week at about $0.9592.
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"The RBA has an easing bias but our view is that they are done for the rest of the year," said Nick Maroutsos, founder and managing director at Kapstream Capital. "If the Aussie dollar was trading at this level when the RBA last cut rates I think that it would have probably not cut or treaded a bit more carefully," he told CNBC.
Sentiment towards the Australian dollar, one of last year's best performing currencies has turned increasingly bearish this month with some strategists forecasting a fall to $0.80. Even with that decline, the Aussie dollar is still up some 22 percent from where it traded four years ago.
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"The primary reason why the RBA cut interest rates [in May] was because they [policymakers] were worried about the damage that a strong currency could do the economy," Kathy Lien, managing director at BK Asset Management, said in a research note.
"Now that the Aussie dollar has fallen more than 8 percent from its April high, the bar is high and the economy would need to deteriorate significantly for the RBA to consider another rate cut," she added.
— By CNBC.Com's Dhara Ranasinghe; follow her on Twitter