Threats to the AUD rally: Low CPI, President Trump – Westpac

Sean Callow, Research Analyst at Westpac, notes that there is around a 15% chance of an RBA rate cut on 1 November, about the same as the chance of Donald Trump becoming president, according to money market pricing and Nate Silver’s election model respectively.

Key Quotes

“Both outcomes would be substantial negatives for the Australian dollar, a Trump presidency probably causing more damage. But while the memories of a Brexit-style upset mean we are likely to need to wait until 9 November (AEDT) for clarity on the US presidency, we could have a much clearer picture of the risks of a Nov RBA easing by Wednesday, when we see Australia’s Q3 CPI data.

Given that the RBA’s 4 October statement repeated familiar language on inflation and concluded with a neutral outlook, we had not placed great weight on the Q3 data in terms of triggering another rate cut. But this week’s RBA commentary has raised the stakes. In the October minutes, the Board noted that Q3 CPI would be available for the November meeting. And Governor Lowe declared the report “important” in a speech where he focused on the drivers of low inflation.

Both total inflation and underlying or core inflation are firmly below the RBA’s 2-3% medium term target. Lowe reiterated that the RBA is willing to be patient. But a downside surprise on Q3 CPI could open the door to further easing at some point – albeit still probably not in November. Westpac expects inflation to be high enough for a rate cut before year-end to be very unlikely.

AUD/USD traded well anyway this week (at least until the poor jobs data today), with the US dollar losing some steam and commodity prices still very supportive. We expect the domestic story to broadly positive near term but see the Aussie back to 0.76 over the month ahead, mostly due to a firmer USD. But if there is a surprise win for Mr Trump, our year-end 0.74 target could arrive early.”