(04 JUNE 2019)DAILY MARKET BRIEF 2:AUD in demand despite RBA rate cut
The decision made by the Reserve Bank of Australian to cut its Cash rate by a quarter-percentage point to historical low 1.25% came as expected. The statement made by RBA Governor Philip Lowe two weeks ago already signaled the intention. Historically, the last rate move occurred in 2 August 2016 (-0.25% to 1.50%) while the last rate hike came in 2 November 2010. The recent development in employment, slackening inflation and global trade disputes are the main reasons for the call.
CPI in 1Q came at 1.30%, largely below 2% - 3% target band while unemployment rate rose 5.2% in April, highest in 8 months. RBA 2019 forecasts for GDP and inflation are now 2.75% (prior: 3%) and 2% (prior: 1.75%). Yet the rate decision appears to have a limited impact on the FX market, as the Aussie appears to be favored despite the rate cut. There is indeed an explanation to this, since US/Australian yield differentials are favoring AUD. 10-year spreads are lowest since March 2019 (0.6053) due to recent US yields fall, suggesting that AUD should continue to gain support short-term. However, the decline in AUD/USD should come soon enough.
