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The Reserve Bank of Australia (RBA) was never likely to cut the cash interest rate at June’s meeting of its policy makers, but there was a strong possibility the language in its statement would deliver a clearer bias towards further easing.
The initial spike in the Australian dollar to $0.7422 from $0.7370 and the three-basis point move in the Aussie two-year treasury, suggests some market participants were hoping for guidance along the lines of ‘further easing of policy seems appropriate given the inflation outlook’. That didn’t happen and the RBA delivered an uneventful statement that could give renewed belief to Aussie dollar bulls. The interest rate market has been quite well bid, with the swaps market showing that the implied probability of an August rate cut has dropped ten percentage points to 41%.
One point of interest was the focus on the housing market. The statement mentioned that ‘dwelling prices have begun to move again’ and this is something the RBA policy setters will be keen to monitor, but they hardly sound overly concerned at the moment.
US Federal Reserve chair Janet Yellen highlighted in an overnight speech the door was ajar for potential changes to monetary policy, but the Fed is likely in a holding period as markets navigate through some strong event risks in June and July. It seems the RBA is no different. The statement did note conditions are fairly calm, but also made reference to the fact that funding for high quality borrowers remains very low and if it wasn’t for inflation then the RBA would be on hold for some time.
The RBA rate setters will now focus on the second-quarter inflation data due on 27 July. Judging by the recent Melbourne Institute inflation figure, inflation could fall from the current growth of 1.3% year-on-year. It would then make sense for an August rate cut, if there’s one at all. By then the bank will have more evidence on domestic employment, the second-quarter inflation read, clarity on the Aussie election and of course the UK referendum on continued EU membership. It’s also possible that China comes back into market focus at any stage.
If we take a measured view on the potential outcomes of these events, and the fact that speculative traders are the most bearish on VIX futures ever, then one suspects the probability is that we come through the June to July period unscathed. This again highlights a core focus on the second-quarter 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 wonders if AUD/USD can squeeze higher from here. Certainly, if the RBA was really concerned about the exchange rate it 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.