AUD/USD: 2-year Spread Consistent With A Move Towards 0.70 Rather Than 0.75 - BTMU

AUD/USD: 2-year Spread Consistent With A Move Towards 0.70 Rather Than 0.75 - BTMU

27 July 2016, 17:16
Vasilii Apostolidi
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The probability of the RBA cutting rates on 2nd August have declined a touch after the Q2 inflation data showed a slightly higher trimmed mean rate, which remained at 1.7% rather than falling to 1.5%. The overall CPI reading was a little weaker while the weighted mean rate was in line with expectations. So it remains a very close call at this stage on whether the RBA will act next week.

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We just about lean in favour of a 25bp cut given the data will not alleviate low inflation concerns within the RBA. The 2-year yield and the 3-month OIS both increased by a few basis points but still imply a greater than 50-50 chance of a rate cut next week. That perhaps is one factor undermining AUD/USD – the data has certainly not shifted expectations greatly that the RBA will ease.

Furthermore, on a relative basis, like with EUR/USD – the 2-year spread with the US has seen the premium in favour of Australia falling to a new low this month as yields in the US pick up again and the spread is consistent with AUD/USD closer to 0.7000 rather than 0.7500.

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