The RBA leaves the door open for an August rate cut

The reaction in the market said it all. A number of traders were clearly positioned for the Reserve Bank of Australia (RBA) to give a more definitive easing bias, perhaps a re-introduction of the view that ‘continued low inflation may provide scope’ to cut interest rates.

Source: Bloomberg

That hasn’t been added to the statement and subsequently we have seen some modest strength initially in the AUD, taking AUD/USD into $0.7546 (from $0.7520 pre-RBA statement).

Interestingly, there was no focus at all on Australian politics and the central bank downplayed the impact of the UK referendum – at least in the view that it was hard to ascertain the effects of the vote on economics outside of the UK. However, the last paragraph of the statement always sets the stage, ‘over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate’, implying the door is open for an August rate cut. This meeting is ‘live’ and this seems to be the major drawcard for why the market has reversed the earlier strength and AUD/USD is now eyeing a move sub-75c.

The market will be keenly watching volatility in global markets, which could play into the implied probability of an August cut, which has remained unchanged today at 45%. On the domestic front, we get the next employment report on 14 July, while the absolute MacDaddy release will be the Q2 CPI print on 27 July. The CPI print will solidify rates expectations. Another low ball print seems to be likely and in my view, be the nail in the coffin for an August rate cut.

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