RBA expected to cut rates

Forex News and Events

The influence of accommodating monetary policy continues to dominate financial markets. Today the evidence is clearly witness in Australian. Accommodating policy drives currency lower while pushing equity markets higher (regardless if central bankers call it a currency war, competitive devaluation or QE policy). Overnight the AUDUSD sold-off to 0.7840 slowing its recent bullish advanced. The stock market was slightly softer, as S&P/ASX reached a seven years high at 5955.50. The key driver was the collapse of Australia’s private capital expenditure. CAPEX for Q4 2014 declined -2.2%Y against expected -1.6%Y fall. This is the critical first read of capital expenditures for 2015-2016 since its sets the tone for the rest of the year. The estimates came in at AUD109.8 billion against the market consensus for AUD119 billion. A sizeable deceleration in spending expectation. As expected the biggest hit was the mining sector yet there were cuts in non-mining sectors recovery, dimming forward outlook, and suggesting broad-based economic weakness. The rates market were quick to react sending expectations for a RBA OCR cut to 52% from 38%. Given the FOMC slightly dovish turn, the RBA now has more room to cut without any geopolitical backlash (accusations of targeting FX). We now expect the RBA to cut 25bp at next week’s rate decision meeting as signs of slowing growth has increased. As a results we anticipate further weakness in AUD. AUDUSD recent recovery nearing 0.7942 downtrend provide opportunity to reload short positions (see Daily Technical Report). That said, with China expected to accommodate further with RRR cuts, rate cuts and financial reforms in the medium term these will be bullish development for Australia growth outlook.

USD and global yields are shifting lower based on the view that Fed Chair Yellen’s testimony indicates a more dovish Fed. We suspect that Yellen is more likely taking a balanced approach to limit USD strength and slow yields uptrend. The Fed wants to tighten monetary conditions when they believe the time is correct, and not have tighter policy forced on the US by the market. After recent US data disappointments, robust new home sales at 481k was a positive result. With labor market data coming in particularly strong , it’s only a matter of time before we start to see wage prices improve (next week payroll will be watched). Given this base scenario we expected the Fed will be ready to changed its guidance at April 29th rate decisions meeting. Today’s inflation read will be critical test of our view. A significant erosion in core CPI might make use reconsider our call for Aprils removal of “patient” from the Feds conversation. Despite short term liquidations of overbought USD long, we remains constructive on the USD based on policy divergance.