In his semi-annual testimony before Australian parliament yesterday, RBA governor Lowe told law-makers that he stands ready to reduce interest rates further if necessary. However, Lowe tempered his message saying that the Australian economy is likely through the worst of the slowdown.

Lowe's comments came as the bank released its quarterly statement on monetary policy in which it pushed back its projections for growth, inflation and employment based on current projections of two further cuts which would bring the cash rate down to 0.5% from the current record lows of 1%.

Economy At Gentle Turning Point

Lowe told the parliamentary panel “There are signs the economy may have reached a gentle turning point… Consistent with this, we are expecting the quarterly GDP growth outcomes to strengthen gradually after a run of disappointing numbers.”

Lowe went on to say “While we might wish it were otherwise, it is difficult to escape the fact that if global interest rates are low, they are going to be low here in Australia too,” Lowe said in his semi-annual testimony. “Our floating exchange rate gives us the ability to set our own interest rates from a cyclical perspective, but it does not insulate us from long-lasting shifts in global interest rates driven by saving/investment decisions around the world.” Offering further clarification, Lowe told the parliamentary panel "It's possible we end up at the zero [rate] lower bound. I think it's unlikely but it is possible,"

Lowe Defends Rate Cuts

The RBA held rates unchanged in August following two consecutive prior rate cuts in June and July. However, the market is currently pricing in two further rate cuts over the remainder of the year, in line with the RBA’s own guidance. Lowe defended the recent rate cuts, saying "If we didn't have the level of interest rates we have today — let's say they were 1 percentage point higher — I'm confident the exchange rate would be higher” which he explained "would be hurting our agricultural sector, our miners, our tourism sector, the education sector."

In the bank’s quarterly statement it said "The signs of stabilisation in the housing market reduce one possible source of downside risk to consumption growth and could provide some upside risk towards the end of the forecast horizon,"

Growth Forecasts Cut

In terms of growth, the RBA revised its forecast on GDP for 2019 lower from 2.75% to 2.5%, as well and also outlined a  more subdued outlook on inflation through 2020.

The bank went on to say "Uncertainty is clouding how much any increase in labour demand will be met by unemployed workers finding jobs, existing employees working more hours or a further increase in the participation rate,"

However, despite the downside risks, the RBA noted that reductions in the cash rate as well as reduction federal government tax, should help boost growth in household consumption over the medium term, with a pickup in the property market also expected to contribute.

Technical Perspective

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AUDUSD tested the .6757 level this week, piercing below the level to trade fresh 2019 lows around .6676 before reversing strongly and closing back above the level. The bullish pin bar at lows, creating a potential double bottom, suggests the likelihood of a further recovery higher. However, there is plenty of resistance in the near vicinity with the .6835 - .6863 zone sitting just above market. Above there we have the mid July .6924 level. Until price is firmly back above these levels the risk of further losses remains high in the near term.