RBA Cuts But Aussie Flies

Market Drivers May 05, 2015
RBA cuts by 25bp says Aussies needs to weaken
UK Construction PMI weaker
Nikkei 0.6% Europe 0.61%
Oil $58/bbl
Gold $1188/oz.

Europe and Asia:
AUD Trade Balance -1.32B vs.-0.98B
AUD RBA Cash Rate 25bp
GBP UK Construction 54.2 vs. 57.2

North America:
USD ISM Non-Manufacturing 10:00

The Reserve Bank of Australia lowered its benchmark rate by another 25bp to 2.00%, stating that "the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand." The Aussie, which initially dipped on the news, recovered quickly as currency traders judged that this will be the final cut by the RBA for some time to come.

Although there was nothing in the communique to suggest that the the RBA was finished with its easing program, the market concluded that this would be last cut this year. The Australian cash futures curve stood at 2% all the way out to October of 2015 indicating the benchmark rate will not be lowered any further.

The RBA was moderately upbeat in its assessment of the economy noting ,"In Australia, the available information suggests improved trends in household demand over the past six months and stronger growth in employment. Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year."

The RBA authorities remained concerned with the strength of the Aussie noting that "Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices." Indeed it quite likely that one of the key drivers for today's decision was the recent sharp rise in AUD/USD which saw the pair rise through the 8000 level. The RBA would prefer to see AUD/USD trade at 7500 or below and the events of the past several weeks may have forced its hand with respect to the interest rate decision.

Although the short term yield on AUD/USD is now 2% it is still one of the highest rates of return in the industrialized world and as such continues to make the pair vulnerable to carry trade flows until yield differentials begin to contract. That's why today's US ISM Non -Manufacturing report could be key to the pairs near term moves.

The market will watching today's data very carefully as the ISM Non-Manufacturing report is considered to be the best forecaster of the NFP release due this Friday. Recent US data has been nothing but a barrage of disappointments as evidenced by the Citibank surprise index and if today's report misses the mark as well, market expectations for a Fed hike will recede further into horizon and that could push AUD/USD back through the .8000 level before the end of the day.