Chris Weston, Chief Market Strategist at IG Markets
The RBA were never going to cut the cash rate today, but there was always a strong possibility of a clearer easing bias in the last paragraph.
Judging by the initial spike from $0.7370 to $0.7422 and 3bp move in the Aussie two-year treasury, one can tell that some market participants were hoping for guidance along the lines of ‘further easing of policy seems appropriate given the inflation outlook’. That hasn’t occurred and the RBA have delivered a statement that is fairly dull, uneventful and could give some renewed belief to AUD bulls. The interest rate market has been quite well bid, with the swaps market showing the implied probability of an August hike has dropped ten percentage points to 41%.
One point of interest was the focus on the housing market, which made mention that ‘dwelling prices have begun to move again’ and this is something they would be keen to monitor, but they hardly sound stressed here.
Fed Chair Janet Yellen highlighted in her overnight speech that the door was ajar for potential changes to monetary policy, but the Fed are likely in a holding period as markets navigate through some strong event risks through the June to July period and it seems the Reserve Bank are no different here. The statement did make focus of the fairly calm conditions, but they also made reference that funding for high quality borrowers remained very low and again if it wasn’t for inflation then the RBA would be on hold for some time.
However, that is not the case and their focus is firmly on the Q2 inflation on 27 July, where judging by yesterday Melbourne Institute inflation figure could fall again from the current pace of 1.3% yoy. It then makes sense for an August cut to occur (if at all), as it provides more evidence on domestic employment, the Q2 inflation read, clarity on the Aussie election and of course the UK referendum. All the while China has the possibility of coming back into the markets foresight at any stage.
Interestingly if we take a measured view on the outcomes of these events and the fact that speculative traders are the most bearish on VIX futures ever, then one suspects that the probability is we can come through the June to July period unscathed. This again highlights a core focus on the Q2 inflation print as the smoking gun, but one thing is for sure in 2016. If traders do the opposite of what feels right they would do well.
With implied probability of a Fed hike falling to a 50/50 probability by September one questions if the AUD/USD can squeeze higher from a here. Certainly if the RBA were really concerned about the exchange rate they could have better met market expectations. Technically, a daily close above $0.7409 (the 38.2% retracement of the April to May sell-off) would suggest a short-term move into the $0.7500 to $0.7600 area, so traders will be keen to watch how price reacts around here.