The Australian dollar retreated as policymakers reminded markets of the risk of rate cuts, nudging bond yields lower.
The Aussie dollar slipped 0.4 per cent to 71.46 US cents and away from a six-week peak of 71.93, hit last Friday in the wake of solid Chinese data.
Australia’s central bank believes a cut in interest rates would be “appropriate” should inflation stay low and unemployment trend higher, though there was no strong case for a move in the near term.
Minutes of its April board meeting, released on Tuesday, showed Reserve Bank of Australia policymakers acknowledged the economic effect of ever lower rates could be smaller than in the past, given high household debt and crumbling property prices.
Yet easing would still have some stimulative effect, in part by causing a likely decline in the Aussie.
With other central banks around the world turning dovish in recent months, the RBA has come under pressure to follow, simply to stop its currency from rising and hurting exports.
The RBA’s board also agreed that a hike in rates anytime soon would be unlikely given inflation remained so subdued. Consumer prices for the March quarter are due next week and could well show the inflation rate slowed further.
“A modest disinflationary pulse looks likely in early 2019,” said Su-Lin Ong, heads of Australian fixed income strategy at RBC Capital Markets.
“We think that the RBA’s pain threshold for the unemployment rate that will trigger rate cuts is 5.25-5.5 per cent.”
The jobless rate surprised in February by dipping to an eight-year low of 4.9 pe rcent, but median forecasts are for a rise to 5.0 per cent in March.
The data is due out on Thursday and will be a major event for markets.
“The RBA reminded us that rate cuts still work even with some challenges,” added Ong.
“As was the case in 2015 and 2016, the onus will be on the data to push the Bank to cut.”
Investors have been wagering on an easing for a while and futures are full priced for a quarter-point reduction by October, with July around a 50-50 shot.
Australian government bond futures rose, with the three-year bond contract up three ticks at 98.575.
The 10-year contract firmed 2.5 ticks to 98.0650.