Friday in Asia, the Australian dollar plunged against its major counterparts as the Reserve Bank of Australia said the country's near-term economic outcome is likely to be weak, but that a recovery is expected to start by the end of the year. The Aussie slumped to an 8-day low against the kiwi.
The RBA lowered its forecasts for the pace of economic growth over this year and next while signaling any future interest rate cuts may be smaller and less frequent, ahead of an expected recovery. The central bank said the need for further cuts will depend on economic and financial developments, which it is watching closely amid recent signs that a distressed global economy could be turning for the better.
In its First Quarter Monetary Policy Statement, the RBA slashed its GDP forecast for Q2 to -1.25 percent on year, marking what would be Australia's first recession in nearly 20 years. The RBA said it expects GDP to return to positive by June 2010, and to grow to 3.75 percent by December 2011.
The RBA expects the economy will contract by 1.0 per cent in the fourth quarter of 2009 from a year earlier, down sharply from its February forecast of 0.5 per cent growth. The bank also lowered its second quarter and fourth quarter 2010 forecasts and expects fourth quarter 2010 gross domestic product growth of 2.0 per cent, down from a February forecast of 2.5 per cent.
The RBA also raised its forecast for underlying inflation for the 4th quarter of 2009 to 3.25 percent from the previously forecast 3.0 percent.
The policy statement and forecast comes just three days after the central bank's policy board decided to leave the official cash rate unchanged at 3.0 percent. The bank noted at the time that monetary policy has been eased significantly, and that much of the effect of the changes had yet to be seen.
In its official interest rate statement, RBA Governor Glenn Stevens said conditions in global financial markets remain generally on a path of gradual improvement, but that credit remained tight.
A record 4.25 percentage points of interest-rate cuts since September and government spending will provide significant support to domestic demand, the central bank said in its quarterly monetary policy statement released in Sydney. Signs that a recovery may already be emerging include reports this week showing retail sales jumped in March, the unemployment rate dropped and exports to China have surged 80 percent this year.
Australia's recession will be less severe than in many other countries, helped by lower borrowing costs for home buyers and businesses, the nation's healthier financial system, a decline in the currency and the recent recovery in the Chinese economy, today's statement said.
A fall in Asian stocks also reduced investors risk appetite, which pushed the Aussie down. The Australian stock market opened on a weak note today with investors taking Wall Street cues and pressing some sales in early trading.
The benchmark S&P/ASX 200 Index, which drifted down to 3,910 earlier, recovered to 3,935 subsequently, but has faltered once again due to a strong round of selling in some material, financial and consumer staple stocks. The index is currently trading at 3,921, down 17.17 points from its previous close. The All Ordinaries index is down 14 points at 3,898.
The Aussie soared to new 7-month highs against its most major counterparts yesterday on better than expected employment report. Australian employers unexpectedly added 27,300 workers in April, pushing the unemployment rate down to 5.4 percent from 5.7 percent, the first drop in eight months.
The Aussie fell to 1.2687 against the New Zealand dollar during Asian deals on Friday. This set the lowest point for the aussie since April 30. If the aussie weakens further, it may test support around the 1.249 level. The aussie-kiwi pair was worth 1.2750 at yesterday's close.
The Australian currency that jumped to near a 2-month high of 1.2950 against the kiwi on April 30 has lost 2% since then.
In Asian trading on Friday, the Aussie slipped against the currencies of U.S. and Canada. At 10:45 pm ET, the aussie touched 0.7511 against the greenback and 0.8804 against the loonie, down from Thursday's close of 0.7546 and 0.8827, respectively. The near term support level for the Australian dollar is seen at 0.866 against the loonie and 0.734 against the greenback.
U.S. bank regulators said yesterday that about half of the country's biggest financial institutions need to improve their capital positions in order to ensure that they can weather a further downturn in the economy.
The results of the government's stress test showed that 10 of the 19 banks tested need to raise a total of $74.6 billion. The banks involved in the exercise account for two-thirds of the assets and more than half the loans in the U.S. banking system.
The Australian dollar, which closed yesterday's trading at 74.86 against the yen dropped to 74.38 in Asian deals on Friday. The next downside target for the aussie-yen pair is seen at the 72 level.
The Bank of Japan board members predicted that the Japanese economy is likely to continue to deteriorate through the end of 2009, minutes from the April 6 and 7 monetary policy meeting revealed today. Some of the board members said that additional steps may be required to assist corporate financing, and that the purchase of corporate bonds was acting as a safety net for the near term - although they didn't want the bank to get overly involved in the process.
At the meeting, the bank unanimously retained its key interest rate at 0.1 percent and decided to expand the range of eligible collateral for its provision of credit to facilitate money market operations.
During Asian deals on Friday, the Australian dollar declined to 1.7795 against the European currency. This may be compared to yesterday's North American session close of 1.7757. On the downside, 1.80 is seen as the next likely target for the aussie.
Yesterday, the European Central Bank said it plans to spend about 60 billion euro ($80 billion) buying covered bank bonds in a bid to stem the euro zone's economic decline. The ECB also cut its main interest rate to 1 percent, a record low.
The German trade balance and the industrial production reports-for March are expected in the upcoming European session.
Across the Atlantic, today will be a busy day with the releases of the U.S. and the Canadian employment reports.
Economists estimate that the U.S. economy lost 600,000 jobs in April and look for an unemployment rate of 8.9%.
Analysts expect the Canadian unemployment rate to increase to 8.3% in April from 8% in March.
The U.S. Commerce Department is due to release its wholesale inventories report at 10 am ET today. Economists expect wholesale inventories at the end of March to show a 1% decline.
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