AUD: RBA Likely to Ease? – Rabobank

AUD: RBA Likely to Ease? – Rabobank

2 May 2016, 10:22
Roberto Jacobs
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AUD: RBA Likely to Ease? – Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that the expectations regarding the chances of another RBA rate hike spiked higher on the back of the much softer than expected Q1 CPI report.

Key Quotes

“The annual rate of inflation for the trimmed mean and weighted measures eased to 1.7% y/y and 1.4% y/y respectively well below the RBA’s target for a combined measure of these gauges which stands at 2% to 3%. While this year’s recovery in oil prices will reduce the drag on the CPI indices going forward, this base effect is unlikely to kick in until the latter part of 2016 particularly if the AUD maintains the uptrend that has been in place since the start of the year.

Despite strong gains in employment in Australia we see the low level of wage inflation as a constraint on domestic demand.

The market is currently pricing in a 58% chance of a rate cut on May 3. That said the Bloomberg survey suggest that the consensus of economists is bias in favour of steady rates with just 10 of the 24 surveyed expecting the central bank to cut rates on May 3. One potential complicating factor for the RBA is the coincident timing of Australia’s May 3 budget.

Earlier this month Moody’s warned the government that the country’s AAA credit rating could be at risk unless that the Treasurers exercised fiscal restraint. If Australian does lose its AAA credit rating, this is likely to impact the ratings of commercial banks and therefore is would likely increase the cost to them of wholesale funding. This would likely lead to an increase in the cost of credit which could be seen as a price to pay for not so prudent budget choices. That said, one of the impacts of Basel 3 was to encourage banks to diversify funding and thus to reduce reliance of wholesale funding. This could mean that the additional cost to banks from one downgrade from a ratings agency could be contained.

Irrespective of whether there is a credit rating downgrade we would argue that the weak inflationary backdrop suggests that the RBA already has ample reason to cut rates. That said, the committee may favour waiting for the detail of the budget in order to examine the likely overall impact on the economy. For this reason we would see a steady policy announcement on May 3 as exaggerating the chances of a rate cut by the summer months and we would favour any rally in AUD/USD next week as a selling opportunity. We look for a move towards AUD/USD0.73 on a 3 mth month view. This assumes a June rate hike from the Fed.”


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