The Aussie Dollar's Plunge: RBA Paused, but the Door Remains Ajar

AUD: RBA paused, but kept the door open

The Aussie dollar has dropped below the key 0.6400 support following the combined impact of grim PMI figures out of China and the Reserve Bank of Australia (RBA) keeping rates on hold. But even when compounding these two drivers, the collapse in AUD/USD appears quite overdone.

The Aussie dollar is already pricing in a considerable amount of risk premium related to the slowdown in the Chinese economy, meaning it can show an asymmetrically positive response to any positive news (e.g. fiscal/monetary stimulus) moving on. Domestically, the RBA pause had more than one string attached. The last statement under Governor Philip Lowe (Michele Bullock will replace him in two weeks) kept the door well open to more tightening if needed, essentially reiterating a data-dependent approach that has so far been closely followed by the RBA.

Markets are not pricing in any more hikes by the RBA, meaning the room for any dovish surprises to hit AUD is small. Instead, we would be wary not to rule out any more hikes just yet. We see decent room for a recovery for the battered AUD.