Australian banks to face strong headwinds

The Reserve Bank steps up to the plate and the playbook around the AUD is diverse.

Source: Bloomberg

Interest rate markets suggest a 52% probability of a cut, so it’s no surprise that AUD/USD options implied volatility is the highest level since September 2009. The market therefore is screaming out that we could see a big move today. I’d love to say it’s binary, but that just isn’t the case.

The first port of call will be how the market (actually, algorithms) reacts to changes to the cash rate. From here traders will then read the statement for clues of additional future easing, so it’s worth recalling that the markets are pricing in an additional 13 basis points of tightening over the coming 12 months, on top of a near-term cut. Will the statement justify this? We also know the speculative players in the market are running a sizeable net long AUD position, so this is also a consideration. My own opinion is that the RBA will keep rates at 2% and produce a much more dovish statement. With this in mind, I would not be surprised to see a spike into $0.7764 (the pre-Q1 CPI level) before sellers move in. AUD/JPY should have the bigger reaction, as the pair has been smashed over the last week.

Certainly we’ve seen good buying in AUD/USD overnight, but this is more a function of a below consensus US manufacturing ISM print than strong pre-RBA positioning from traders. It’s worth also pointing out that May is seasonally a great month to be long the USD, with the USD index rallying in the month of May for the past six years. Certainly, the USD has gotten off to a poor start this month, but with the Fed funds future pricing so sanguine around future rate hike pricing, the downside seems limited. But with the USD trending lower I would certainly caution buying USDs now.

The reaction in Australian equities should be less pronounced today and traders still have the mine field of having to deal with ANZ’s 1H earnings. From first blush, the cash earnings are well below consensus, but there also seems little to inspire from return on equity, dividend or provisioning. We could be staring at a tough day for the market. We are currently calling for an 18 point rise on open for the ASX 200, but with SPI futures currently closed, this doesn’t reflect downside in the Aussie banks. It’s important to stress that while there has been a general rotation into the materials sector, the financial sector is still the epicentre of the market and economics in general.

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.