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Jane Foley, senior FX strategist at Rabobank, notes that the latest RBA interest rate cut has added more urgency to the debate about whether or not the RBA should embark on policies such as Quantitative Easing if further policy stimulus is required in the coming months.

Key Quotes

“The RBA have the advantage of being able to study the impact and the side-effects of the QE used by other central banks in the aftermath of the global financial crisis.”

“Given the headwinds connected with the global economic slowdown and given our view that tensions between the US and the China will persist for some time, we do expect further policy stimulus from the RBA this cycle. That said, we also expect the pressure on the Australian government to relax fiscal policy to heighten. We look for further downside potential in AUD/USD towards 0.65 on a 9 to 12 mth view.”

“Even before the RBA has touched QE, there are worries that about the potential impact on the housing market in Australia with the country already close to the top of global rankings of household debt.”

“It is likely that the RBA would like to avoid QE if possible. However, with short term rates at an all term low, it seems increasingly likely that unconventional methods could be used – though any effort by the government to relax fiscal policy will reduce the pressure on the RBA.”

“The AUD is particularly sensitive to the outlook for the Chinese economy given strong trade links and to the outlook for global growth given its commodity links. While AUD/USD will continue to respond to China-linked headlines, we continue to expect a downside bias to dominate.”