AUD/JPY: Aussie Maintains Dip on RBA Outlook, Home Loans Decline

The Australian dollar is deemed to maintain its drop opposite the Japanese yen today after the Reserve Bank of Australia slashed its economic growth and inflation forecasts in its quarterly monetary policy statement released last Friday, suggesting that the bank remains open to cutting rates in the future. Meanwhile, the Yen is expected to sustain its strength as Japanese Finance Minister Taro Aso’s comments are likely to provide the currency a lift.

The RBA appears to have become more cautious about the Australian economy just as conditions in Europe and the US how signs of improvement. The central bank’s statement on monetary policy reveals that growth and inflation forecasts for 2013 have been reduced, with unemployment seen to drift gradually higher, as investment outside the mining industry remains elusive and a strong currency contains prices. Although the RBA noted that the global outlook has been more positive, domestic conditions still warrant concern. The bank believes mining investment will peak and both the high level of the Aussie and fiscal consolidation will weigh on growth. It also does not forecast a near-term pick-up in non-mining business investment.

As such, the RBA expects below trend growth of 2.5 percent in 2013, lower compared to the 2.75 percent forecast in November. Consumer prices are predicted to rise 3 percent in the year to June 2013, compared with the 3.25 percent increase it forecast three months earlier. Governor Glenn Stevens and his board reduced the Cash Rate to 3 percent in December, matching a half-century low, as they try to revive industries outside mining to rebalance growth. Nonetheless, analysts say the downgraded growth forecasts and the restrained outlook for prices gives scope for further rate cuts if needed to boost activity. In a bleak sign that demand remains subdued, the Australian Bureau of Statistics reported today that home loan approvals dropped in December for a third month in a row in December. Loans granted to build or buy houses and apartments dipped 1.5 percent following the 0.7 percent decline in November. As such, the Aussie is apt to remain lower today.

Meanwhile, Japan’s Finance Minister Taro Aso has halted the Yen’s slump after he expressed that the currency has weakened more than intended during its recent decline to around 90 per US dollar from around the 78 level a few months back.  His comments suggested some surprise within the government at how quickly expectations for more aggressive policy easing translated into declines in the Yen. With the markets paring bets on further declines in the Yen, a short position is then advised for the AUD/JPY trades today.

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