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Australian dollar steady as RBA holds rates at 2pc

Mark Mulligan
Updated

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The Australia dollar on Tuesday put Monday's market upheaval behind it, settling back into a tight trading range reflecting fresh declines in commodity prices, US dollar strength and the Reserve Bank of Australia's decision to hold rates.

In late local trade, the Aussie was fetching US74.91¢, close to the US74.94¢ logged at the same time on Monday.

In late local trade, the Aussie was fetching US74.91¢, close to the US74.94¢ logged at the same time on Monday. Louie Douvis

Although it had crept back above US75¢ in overnight and early-morning trade, the Aussie mainly stayed below its new ceiling, established during the market ructions unleashed by Greece's debt woes and China's moves to calm volatility.

Further falls in the price of iron ore, oil and gold also added to the drag on the local unit.

The currency was little moved throughout the local trading session until the RBA announced it was keeping the cash rate on hold at 2 per cent.

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However, after a small spike on bets that the central bank was done with its current easing cycle, the local unit eased back to within the same range it had held throughout the day.

Pundits were nonetheless split on whether or not the RBA would cut rates further this year, and how this would affect the Australian dollar.

While acknowledging its slide against the greenback, RBA governor Glenn Stevens reiterated his view that the domestic currency remained overvalued on a trade-weighted basis.

"The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies," he said.

Further depreciation unlikely

"Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices."

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Capital Economics' chief economist for Australia and New Zealand Paul Dales agreed the Australian dollar still had further to fall.

"Even though the RBA decided to leave interest rates on hold at 2 per cent for the second month in a row [on Tuesday], and did not provide a clear hint that more cuts lie ahead, we still think that a further weakening in the outlook will prompt it to reduce rates to 1.5 per cent by December," he said.

"This implies that the dollar will continue to weaken, perhaps to US70¢ or below, from US75¢ now."

Nomura's rate strategist for Australia Andrew Ticehurst also sees further monetary easing.

"We continue to look for another reduction in the cash rate in November and believe that the conditions which will warrant such a move, including a higher unemployment rate, will have materialised by that time," he said.

He noted the bank's dissatisfaction with the current exchange rate.

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"The RBA does not appear to be drawing any comfort yet from the lower Australian dollar, and we believe this is a reasonable assessment given the decline in commodity prices since it last cut the cash rate in early May," he said.

Others, however, maintain the RBA is unlikely to cut rates further.

"National Australia Bank retains the view that Australian interest rates will most likely remain unchanged for the foreseeable future, before beginning to rise in late 2016," NAB chief economist for markets Ivan Colhoun said.

However, he cautioned: "The bias of risks in the near term remains of further rate reduction, particularly if Chinese economic conditions deteriorate significantly.

"As a result of the continuing decline in major commodity prices and the ructions in Chinese equity markets, NAB's foreign exchange strategists have revised down their forecasts for the Australian dollar and now expect a year-end target of US72¢, [compared with US74¢ before]," he said.

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