It seems yesterday’s inflation numbers only provided aussie bulls with false hope, at least in the near-term. While the Australian dollar rallied on the back of the Q4 CPI figures, the rally stalled above 0.8000 against the USD overnight. It now appears that bears have retaken control of AUDUSD in the light of reports that the RBA will cut the official cash rate at next Tuesday’s policy meeting.
One article sends OIS rates in the opposite direction
Although the RBA stopped selective briefing a while ago, an article written by veteran reporter Terry McCrann has still managed to send the market into a panic. The article adamantly suggests that the RBA will almost certainly cut the OCR next week and it goes on to explain why yesterday’s CPI numbers aren’t going to stop the RBA from revising its inflation forecasts lower in its next quarterly MPS which is to be released on Friday next week. He argues that the RBA cannot revise its inflation forecasts even lower on a Friday after not electing to lower the official cash rate the previous Tuesday. (Read the full article here).
The market now expects the RBA to cut the OCR next week
Since the article was released last night the probability of a 25 bps rate cut next Tuesday according to OIS rates has increased from around 10% to above 55%. We believe some of this dramatic move can be attributed to the snowball effect but it still highlights how uncertain the market is about what the RBA will do next week. The fact that the RBNZ completely removed its tightening bias at its policy meeting this morning is only adding weight to calls for lower interest rates in Australia, especially given the recent moves by central banks from Europe to Canada to loosen monetary conditions.
What does this mean for the aussie?
The path of least resistance for the aussie is defiantly lower at this stage. The commodity currency is being dragged to levels not seen in 5.5 years by falling iron ore prices and the persistent threat of lower interest rates. The inability of the Australian dollar to capitalise on stronger than expected core inflation numbers due to the seemingly unshakeable idea that the RBA is preparing to cut interest rates highlights how much control the bears still have.
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