RBA finally act

It was deemed the action of least regret and the RBA chose to get ahead of the curve instead of waiting for another quarter of subdued inflation data.

Source: Bloomberg

It was deemed the action of least regret and the RBA chose to get ahead of the curve instead of waiting for another quarter of subdued inflation data. Clearly we will see this cut reflected in Friday’s Statement on Monetary Policy, but the RBA, sensing a period of inflation outside of their target range, has acted in-line with their single mandate. There also seems a belief that this will not cause a sudden spike in housing activity and this would have been a key consideration. Importantly, one bank has already said they will pass the full cut on. We went into the meeting knowing that the institutional leveraged funds were holding the largest net long position since Q1 2013. Retail traders have certainly been more sanguine and IG’s clients had a much cleaner reflection of market pricing, going into the RBA meeting with 52% of open positions net long. Certainly, short positions have been building since the poor Q1 CPI and again this has been mirrored in the implied probability of a cut, which just prior to Q1 CPI stood at 15%. The fact that the hedge fund community were running such a long position could have been another consideration for the Reserve Bank. Cut rates and give credibility to the commitment to its gentle jawboning and ultimately take a key factor in holding AUD longs.

The reaction in the AUD has been swift and aggressive with AUD/USD dropping from $0.7708 to a low (so far) of $0.7556. The 1.3% downside move has still been overshadowed by the 2.03% drop after Q1 CPI, but moves in AUD/JPY are even more aggressive, which is what you would expect given it has been smashed of late. Traders have piled into Australian bonds, with two-year bond yields falling 13 basis points.

The question now is whether the RBA back this up with a further cut this year. Certainly, the statement leaves the door open to further easing, although it is not dovish enough to feel they are going to cut below 1.5% anytime soon. How many central banks currently have the ‘door ajar’ now for further moves! As it stands, the market is pricing in further easing over the coming year and this may be enough to push AUD/USD into the March and April lows of $0.7500 and onto $0.7450 (the 38.2% retracement of 14.8% rally seen between January to April). Long EUR/AUD looks like a better trade right now, given the USD is out favour. I would be holding for a move into $1.5350 area.

While this is a new blow to savers, it will be a modest positive for mortgage holders and will be a huge positive for Malcom Turnbull. One hopes Mr Turnbull is a Leicester City fan too and he’s had the best day of his life.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. 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. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.