Established in 1974
185,800 clients worldwide
Over 15,000 markets

The Turnbull effect

Prime Minister Turnbull’s decision to load the chamber to pull the trigger for a double dissolution election might be a politically interesting event, but from a strategist point of view, it’s adding to the ‘Perfect Storm’ we see facing the AUD.

AUD
Source: Bloomberg

Bringing forward the May Budget to coincide with the May Reserve Bank of Australia (RBA) meeting has seen the interbank markets pricing a May rate cut at just 24.6%, down from 35% just before Turnbull’s announcement yesterday.

With the May Budget taking the May RBA meeting out of the equation, we look to June and December meetings, which was when the market was pricing in the strongest chance of a rate cut.

June has moved from a chance of 57.6% a month ago to 33% at the close of business yesterday. December has moved from 77.9% a month ago to 62% now. Now time value is also in play for the December price, meaning the likelihood of a cut is actually under 50% for most of 2016.

AUD/USD retested 76c in the US session, hitting 76.2c as expectations of a rate cut in Australia are slashed.

Expectations of a rate cut were one of the only headwinds to be suppressing the AUD in 2016. With the election now putting the RBA slightly to one side, the AUD is likely to move higher still. With the Fed stepping back from rate hikes and Europe and Japan holding the line on negative rates, it will be with a broad brush that the AUD moves positively against.

AUD’s ‘Perfect Storm’ rationale

  • Australian bond yields that are more than 250 basis points above rates in Europe, Japan and North America are a clear carry trade opportunity. The risk to the trade is back stopped by:
    • A sovereign nation with a AAA credit rating
    • A federal budget in better shape than forecasted (bond buying may ramp up after the May Budget)
    • Country GDP growth at the top end of the developed world
  • Commodities cycle forming a base, seeing upside pressure in AUD having being sold on expectations of a commodities collapse
  • China’s impossibility of falling, and a call on GDP reaching 6.5%. This will increase demand for industrial metals which puts further upside pressure on AUD
  • The RBA unlikely to move rates in either direction in 2016
  • An Australian election and a May budget will keep the RBA out of the market until at least 5 July at best if it is to move

The RBA may want an AUD at the lower end of 70 cents, and some even want it at 65 cents. However, in the coming three to four months, it is hard to see the AUD finding anything other than support when it weakens slightly. 

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.