I think the case for a rate cut has been sufficiently built for the RBA instead of waiting until the CPI data on the 24th October. No longer do they have the luxury of resting on their laurels and waiting for the Australian data to turn on it’s heels before acting.
The offshore crisis and the significant downturn, plus further downward revisions for future world growth would have put the heebie jeebies up the Governors blouse and have him ready to ring the bell…”rate cuts are coming everyone, Xmas is back on!”
The case for a rate cut next week:
1. Global growth: China continues to implode just as Greece and Madrid civilians start rioting.
2. The labour market: Sure the unemployment rate has come down but that’s only due to the hidden unemployment rising rapidly. i.e. job seekers are giving up and leaving the workforce.
3. Mining cut backs: This is potentially the biggest headache for the RBA. China continues to default on mining contracts and Australian mining companies will suffer. This alone will force the RBA to cut.
4. Overvalued AUD: It’s time the RBA weighed in to take the pressure of the retail sector. It is being crucified by the strong dollar. “Hopefully” a rate cut will dampen offshore investors appetite for the AUD.
5. Other central banks: The ECB and FED have stepped up their campaign on the crisis, so it’s time the RBA fell into step. We are on the same planet after all.
6. Local banks are greedy: Just because they cut don’t expect anything from your local Aussie bank. So the RBA will cut by 25bps because they know the local banks will only cut by 0.1.
So as you can see the case for a cut is quite compelling.
Ways to play the rate cut:
Changes in interest rates is usually a great time to hit the AUD crosses. With a shift in the interest rate differential and further signals to cut in the future will send shivers down long term investors spines.
So you should be looking to get short: AUD/NZD, AUD/GBP, AUD/EUR.
Obviously the AUD/USD will take a hammering but the longer term trend trades will be in the crosses.
If you’ve got access to options I’d be looking at a simple low delta put. Something like a 1 month 0.9800 put. it should be cheap but still have plenty of time to come into play. Don’t forget a break of key support around 1.0300 should see it free fall. Plus the CPI data is scheduled for the 24th October. If this comes in weak (as expected) then you won’t see the AUD above parity for much longer.
That’s about it.
Prepare your trades early so when the day comes your not flapping about like a busted mule. Steady the ship, raise your finger….and SELL, SELL, SELL!