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All eyes on the RBA

Investors remain happy buying dips in equities and we saw European and US markets bounce back after some of last week’s subdued performances.

Australian
Source: Bloomberg

However, the greenback was undeterred and kept grinding higher against the majors. Fed member Evans stated that he sees no compelling reason to raise rates in 2015. A dip in the euro set the tone for European equities as the DAX rallied after having been closed for a holiday on Friday. Focus switches to Australia today where the central bank is due to make its May policy decision.

AUD subdued ahead of the RBA

It’s a busy day on the Australian economic calendar today with trade balance numbers due out at 11.30am, followed by the-much anticipated RBA meeting results at 2.30pm. The market is expecting the RBA to cut rates by a further 25 basis points to 2%.

While arguments can be made for and against a cut, the price action in the AUD seems to suggest there is still a lot of uncertainty among traders. AUD/USD has been relatively sidelined a touch above $0.7800, suggesting traders are looking to react to the decision as it is likely to result in a fairly hefty move in either direction depending on what the call is.

A rate cut accompanied by a dovish statement could see the pair head back down below $0.7600 which is where it was trading early April. On the other hand, we could be heading back to test the $0.8000 region if the RBA remains on hold.

Either way, volatility is on the cards today and some traders will be wary of a pre-announcement move similar to what we’ve seen over the past three meetings. ASIC has deemed liquidity issues as the cause and, given the uncertainty around this decision, I wouldn’t be surprised to see liquidity being a problem today as well. Our traders are currently favouring shorts, with 62% of clients short AUD/USD and 38% long.

ANZ does enough

Ahead of the open we are calling the ASX 200 up 0.4% at 5851. Westpac’s result was the highlight of yesterday’s trade as it impacted the whole banking space and analysts are still reacting to the results. Goldman Sachs is the latest to downgrade the bank to Neutral (from Buy).

ANZ has also reported its first half results and the headline numbers seem mixed. Cash profit of $3.68 billion was above a $3.64 billion estimate. However, NIM dropped to 2.04% from 2.15% as competition is getting intense for the lenders.

Remember, Westpac’s NIM came in at 2.06%, which is perhaps what helped driver stronger lending for ANZ. The bank’s capital position seems reasonably sound and it expects to maintain a payout ratio in the 65%-70% range.

While the result is mixed in a way, it seems the result should be enough to inspire some buying after the recent sell-off. Outside the financial space, TPG’s deadline to submit an IIN counterbid to MTU’s is today. This will keep investors pinned on the stocks today.

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