Interest rate cut bets are rising from the bottom
With the Australian dollar in full flight, now above 76 cents against the USD, but also enjoying new highs on the crosses, the RBA may have its “sit on hands” approached forced sooner rather than later. Although this is still the minority view, BT Investment is starting to push the way towards a more realistic view of “Boat Australia”, expecting 50 points worth of cuts in the next 12 months.
BT Investments Vimal Gor reckons the economic drag created by an overly strong Aussie is likely to spur at least half a percentage point of rate cuts from the RBA, which has already reduced the cash rate to a record low 2 percent.
“We’re just sitting here on a slow glide path lower in terms of growth; unfortunately at the same time the currency’s appreciating, which exacerbates the slowdown,” Gor said in an interview last week.
“Certainly the second half of the year looks much more likely than a cut in the first half,” said Gor, who is betting that the front end of the Australian yield curve will flatten and is also implementing his view by using one-year, one-year swaptions.
However, they are hedging their bets, with a short term call of up to 80 cents on the AUDUSD pair, which would put it back to its 2015 highs. I’ve contended the current bear market rally is much like the mean reversion moves in early 2014 and 2015, confused by those same currency forecasters with no money in the game with a new direction and a “bottom”…
