As expected, the Reserve Bank of Australia (RBA) left its official interest rates on hold at a record low 1.5% for the 26th consecutive RBA board meeting. The decision to leave the policy rate at 1.50% took place despite falling unemployment and strong economic growth. The last time the RBA decided to move the cash rate was a 25-basis-point (bps) cut in August 2016.

Although the economy is seen to be improving, the pace appears to be gradual. Hence, there is no real compelling reason for the RBA to raise interest rates. We feel the cash rate should remain at current levels of 1.5% for much of 2019. Our worry is still on household consumption given that household income growth remains low while debt levels are high and some asset prices have declined. Also uncertainties on the external front remain, especially the trade war between the US and China.

The AUD/USD is expected to remain under pressure. Much will depend on how the incoming data from China prints out, given that China is Australia’s largest trading partner. We foresee the AUD to trade between 0.74 and 0.76 in 1H2019 with room to reach the 0.78–0.82 level by end-2019 partly due to an envisaged weaker USD. We foresee the currency stabilizing around the 0.74-0.75 level against the USD in 2018. Meanwhile, we expect the AUD to also strengthen against the MYR with 2018 year-end target to hover around 3.07–3.09, 3.11–3.13 levels by the end of 1H2019 and stabilizing at 3.14–3.16 levels by end-2019.

• As expected, the Reserve Bank of Australia (RBA) left its official interest rates on hold at a record low 1.5% for the 26th consecutive RBA board meeting. The decision to leave the policy rate at 1.50% took place despite falling unemployment and strong economic growth. The last time the RBA decided to move the cash rate was a 25-basis-point (bps) cut in August 2016.

• Although the economy is seen to be improving, the pace appears to be gradual. Hence, there is no real compelling reason for the RBA to raise interest rates. Inflation is at 1.9% y/y, just below the lower end of the RBA's 2%–3% target range, with their preferred measure even lower at 1.75%. Unemployment is at a six-year low of 5% and is likely to fall further with a stronger labour market and some pick-up in wages growth.

• These positive developments should support the GDP growth to average around 3.3%–3.5% in 2018 and 2019. Still, we feel the cash rate should remain at current levels of 1.5% for much of 2019. Our worry is still on household consumption given that household income growth remains low while debt levels are high and some asset prices have declined. Also uncertainties on the external front remain, especially the trade war between the US and China.

• The AUD/USD is expected to remain under pressure. Much will depend on how the incoming data from China prints out, given that China is Australia’s largest trading partner. We foresee the AUD to trade between 0.74 and 0.76 in 1H2019 with room to reach the 0.78–0.82 level by end-2019 partly due to an envisaged weaker USD. We foresee the currency stabilizing around the 0.74–0.75 level against the USD in 2018. Meanwhile, we expect the AUD to also strengthen against the MYR with 2018 year-end target to hover around 3.07–3.09, 3.11–3.13 levels by the end of 1H2019 and stabilizing at 3.14–3.16 levels by end-2019.

Source: AmInvest Research - 5 Dec 2018