Little RBA Cheer for Aussie Dollar Bears - UBS
The Reserve Bank of Australia's (RBA) decision to leave the cash rate on hold at 1.75% earlier this week was expected. According to the UBS team, not so was the neutral rates bias delivered in the post-meeting media release. However, UBS still expects an August rate cut and remain short AUD versus a long USD.
“At the very least, most observers, including us, had anticipated some guidance that further rate cuts "may be required," most likely following the 27 July CPI report. The AUDUSD quickly broke its 100-day resistance level to be trading at 0.744 at the time of writing.”
“Standing out from communication was the lack of an explicit easing bias or "scope to ease" should inflation disappoint. Quite the opposite: "…the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time." There is no dressing it up; on the face of it you could argue the RBA is done.”
“However, let's not come to this conclusion too hastily for three reasons. First, we believe the RBA's response should be put into the context of what's happened since the May meeting. For example, house prices in Melbourne and Sydney have reaccelerated and some activity indicators are reading stronger than expected. We see this "less dovish" rhetoric as the response to these factors.”
“On housing, however, the RBA stuck to its guns about the success of regulatory measures, also saying that "separately, a number of lenders are also taking a more cautious attitude to lending in certain segments." These developments shouldn’t stand in the way of another cut, in our view. Second, the currency remains an important concern to the RBA even after a general decline. Third, the mid-quarter May reading of the MI Inflation Gauge fell in both monthly headline and underlying inflation. We see a 2Q16 core inflation reading of 1.3% year on year as not out of question, which would again miss the RBA's forecasts.”
“We are sticking to our bearish call on the AUD/USD, targeting 0.71 in three and six months, and 0.68 in 12 months. Though the RBA may be of two minds regarding its next steps, to us it's clear, disinflation and the currency remain persistent challenges. We consider an August rate cut likely, despite the lack of guidance from the RBA. We remain short AUD versus a long USD in our global tactical allocation.”