What To Expect From RBA? - Views From 15 Major Banks

The following are the expectations for tonight's RBA May policy meeting as provided by the economists at 15 major banks along with some thoughts on the AUD into the event as provided by the FX strategists at these banks.

Goldman Sachs: We expect a 25bp cut to 2.00%, in line with consensus. We see a solid case for a -25bp rate cut given a likely downgrade to the RBA’s own growth forecasts later in the week, confirmation of still benign inflationary pressures in last week’s 1Q2015 CPI report, relatively low commodity prices, and a still elevated AUD. That said, we acknowledge that a speech by the RBA Governor last week seemed to imply a degree of reluctance to continue the easing cycle given related risks over the long run – including in the property market. As a result, there is a material risk that the RBA defers the next step lower in rates – possibly until there is greater visibility on fiscal policy settings following the 12 May Budget. Either way, we have high conviction that rates will move lower again in the coming months – even if the exact timing of the next move is somewhat less clear.

Citi: Citi's economists are with the overwhelming majority that sees an RBA rate cut at tonight's May policy meeting. Market lean in favor of an ease appears to have been fueled by a series of dovish articles by market commentators, as well as the somewhat firmer tone from AUD. The RBA has expressed a preference for AUDUSD to trade closer to 0.75, so the test above 0.80 last week is seen as supporting the case for a cut. Indeed, we believe this latter argument could prove the factor which tips the balance in favor of action, in part because the RBA will not want to encourage further appreciation amid the pause in the broader dollar uptrend. For the implications on AUD, Citi thinks that while increasing market lean in favor of an RBA cut, there should remain downside for AUD. Thus, with USD stuck in a holding pattern, Citi believes that AUD losses in response to easing should be most pronounced on the crosses such as AUD/NZD.

Morgan Stanley: Our economists expect a 25 bps cut from the RBA and a signal that more action may be necessary. The probability was only raised following the RBNZ’s turn to an easing bias this week.

BNP Paribas: BNPP expects a 25bp rate cut by the Reserve Bank of Australia (RBA), in part prompted by the recent strength in the AUD. Overnight, news from China (a key trading partner) was not encouraging: its manufacturing PMI was confirmed to have dropped further into contraction territory (to 48.9 from 49.2).

Credit Suisse: Credit Suisse thinks the risk is that the RBA stays on hold at tonight's May meeting, while believes that the recent sell-off in AUDUSD can hold into the meeting. The RBA may maintain the view that US data momentum will do the heavy lifting for the bank and push AUDUSD lower. The April employment report is expected to see jobs rise 3K, but for the unemployment rate to rise 0.1pp to 6.2%. While we maintain our bearish AUDUSD view..., we don’t see good risk/reward in playing for a dovish RBA.

BofA Merrill: Bank of America Merrill Lynch expects the RBA to cut in a finely balanced decision at its May policy meeting this week. After weighing up this trade-off we expect that RBA will cut rates again at its May meeting. And although the Bank will likely continue to hold an easing bias, we expect that 2% will be the bottom of this policy cycle. AUD Implications: We think that the more dovish the FOMC become the greater chance the RBA will cut rates due to the impact on the A$. That said, we are not convinced that in the current environment the RBA cutting rates will materially lower the exchange rate. But not doing so would likely support the recent rally. If the RBA do ease policy we expect them to continue to hold an easing bias. Not because we think they will cut rates again, we don’t, but to keep downward pressure on the A$ which will be important, while the RBA waits for the Fed to tighten.

Barclays: An under-priced RBA rate cut and strong US labor market report should push AUDUSD lower this week. We narrowly expect the RBA to cut rates by 25bp to a new record low of 2.00% The RBA has a strong easing bias, recently made clear by Governor Stevens’ in a New York speech, and we expect further easing to reflect concern over the investment outlook and the widening gap between the real exchange rate and the terms of trade. We are mindful, though, that the RBA held fire in March and April and that the strength of housing, together with sticky underlying inflation and better labor market data, may give it pause for thought. Regardless, we expect the RBA to retain an easing bias to maintain downward pressure on the exchange rate. The RBA issues an updated Statement on Monetary Policy on Friday and we see some risk that it will trim its outlook for growth given concerns over non-mining investment, while the forecast profile for underlying inflation might be bumped up a little in the near term

ANZ: We expect the RBA Board to cut the cash rate by 25bps to 2% at its meeting today. The RBA will then release the Statement on Monetary Policy (SoMP) on Friday...Although there has been discussion on the reduced efficacy of monetary policy compared to previous rate-cutting periods, we do not believe that the Board’s concerns in this regard are strong enough to preclude a rate cut today.

NAB: As for the RBA we’ve written and spoken on our view of the economy in recent months, how it has held up, and our view that this argues for the RBA to leave rates on hold in May. The transition to the domestic economy has shown more signs of gaining traction, evident also in yesterday’s building approvals and ANZ Job Ads reports. So, as recent press reports suggest, there will be a recommendation to the Board to ease but will the Board accede to this recommendation and cut? We are the first to recognise the risk of a further move, but we would contend that the Bank should again hold fire, given emerging more favourable economic trends.

UBS: UBS expects the RBA to cut 25bp and to drop the comment that 'further easing of policy may be appropriate over the period ahead'. We expect the RBA to trim their growth outlook in the SoMP but leave their CPI forecasts unchanged.

Credit Agricole: We think AUD will remain vulnerable ahead of tomorrow’s RBA meeting. Given still low inflationary risks and weak growth, we think scope remains for the RBA to ease. Indeed, the OIS curve has priced in a 70% chance of a cut while the Bloomberg consensus also expects a cut. While the market is anticipating fresh easing measures, we think positioning and valuation suggest AUD could still trade lower on the release.

TD: TD expects the RBA to cut rates by 25bps this week to 2%, as does consensus, consistent with the RBA’s February SoMP forecasts. TD forecasts no further rate cuts in this cycle but the Bank is expected to maintain an easing bias, offering to cut rates further (reluctantly in our view) if required. A surprise for the markets would be the RBA cutting to 2% and dropping the easing bias. Risk/reward does not favour positioning for a 25bps cut this week. A long May IB position potentially makes 10 ticks on a cut but will lose 15 if rates are kept on hold. The PnL from a long May IB position is mildly positive on a probability weighted basis, but is not enough to offset potentially wide bid/offer spreads to exit. With the market holding little conviction ahead of Tuesday’s decision and an unattractive payoff profile, we anticipate positioning to be very light.

Nomura: The Reserve Bank of Australia (RBA) is holding its next monetary policy meeting on 5 May. Our view remains that the RBA will cut its policy rate by 25bp . However, with AUD gaining about 4% against USD, breaching 0.80, and more than 3% higher on a trade-weighted basis while commodity prices have declined, the currency will likely be an important point of discussion at the meeting. We believe the divergence between the AUD and commodity prices is likely to encourage the RBA to strengthen its language on the currency in its statement in an effort to cause some convergence of AUD to its fair value.

RBS: We also expect a cut by the RBA on Tuesday, but the risk-reward from a short AUD position is no longer very attractive. We narrowly favour the cut on the basis that this is the same week as the quarterly Statement on Monetary Policy due on Friday, and the RBA has waited three months now since cutting in February. It can justify the cut as another incremental step based on below trend growth forecasts.

Westpac: The Reserve Bank Board meets next week on May 5. As we have argued in previous notes we expect the Board will decide to cut the cash rate from 2.25% to 2.00%...The AUD has appreciated by 5.3% against the USD since the last Board meeting whereas it has 'only' appreciated by 3.2% against the Trade Weighted Index. This is largely explained by the 2.8% fall in the value of the USD Index (DXY). A reasonable conclusion from these observations is that the jump in the value of the AUD in USD terms has been partly due to a fall in the USD. Some increase in the AUD could also be attributed to the recovery in the iron ore price but this price has only recovered to a level which, earlier in the year, was associated with an AUD of USD0.76. Even at that level the AUD was being described by the RBA, at the time, as overvalued. In summary, while there are some 'mitigating circumstances' I expect that the recent surge in the AUD would be viewed quite dimly by the folks at the Reserve Bank.

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