By Evan Lucas, FPMarkets.com
Currency Point – Just do it already, AUD
The RBA is killing me, I have long believed that it would eventually be forced to cut rates in 2019. However, the consistent message had been ‘wait and see’ and ‘employment will save the day’. Thus, I saw the first move in August as it would give the RBA a chance to ‘evaluate’ Q2 CPI and 2 months of employment data post the Federal election and realise it need to finally cut rates.
However, in his speech to the Economic Society of Australia titled: “The Economic Outlook and Monetary Policy”, his final paragraph blew that all up.
“[in] a scenario in which there was no further improvement in the labour market and the unemployment rate remained around the 5 per cent mark… we judged that inflation was likely to remain low relative to the target and that a decrease in the cash rate would likely be appropriate. A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates.”
This begs the question: Why wait? Do it now not in 2 weeks as the RBA governor has just told the market he and Co. will cut rates on June 4 and the market has now priced in a second 25 basis point (bps) rate cut in August too. (So, I might still be right, just that is will be the second round not the first.) It’s a forgone conclusion and the AUD has priced this scenario as fact.
Free Reports:
What’s interesting now from a currency point of view is the AUD could be on track to become a carry trade FUNDING source rather than carry trade destination. The Aussie 10year US 10-year differential could be -125bps as early as August 7 that is attractive and a further AUD negative.
AUD/USD has already bolted in my opinion. The initial bounce back above 69c last week on the surprise re-election of the Morrison centre-right government gave the AUD a sugar hit nut was short lived, and the pair is now not at an entry point of interest.
What are looking like interesting trades is AUD crosses of CAD and JPY. Like AUD/CAD better
Idea: Short AUD/CAD
Looking for 0.90c, entry 0.935c or better, stop loss, 0.95c
Reasoning:
– Dovish RBA with expected 50bps of cuts coming in the next 3 months.
– Australian employment and construction markets to remain subdued
– Canadian Employment and Wage growth have been ahead of expectations
– BoC has moved back to a Hawkish stand point despite some weakness in oil