The Reserve Bank of Australia have effectively thrown caution to the wind, respecting their mandate for price stability, amid diminishing negative effects from lower interest rates.
One noticeable issue here is the lack of concern lower rates are likely to have on the housing market, with even a hint of concern around the apartment market. It seems we may have reached an inflection point where the consumer is just not enthused about where borrowing rates are, and this is something incoming RBA governor Philip Lowe has been arguing in recent times.
There was a slight tweak around Chinese growth, with the underlying pace moderating. This is a 'watch this space', as the financial markets seem reasonably comfortable with China at present and the prospect of 6.5% annualized growth in Q4.
In terms of inflation, the Q2 underlying inflation came in in-line with the forecasts in the May Statement on Monetary Policy, but the pace of wages and inflation expectations globally have provided them enough of an impetus to push them to cut the cash rate to 1.50%.
The reaction in the market was quite interesting, and while the implied probability of a cut today stood around 70%, it seems the bulk of speculative currency traders were positioned for the move lower. The lack of forward guidance in the last paragraph has also been noted, but traders will be watching for any signs this could be replayed in this Fridays Statement on Monetary Policy.
The move in AUD/USD from $0.7540 to $0.7491 didn’t last long and we have seen buyers coming in around the May uptrend support. Interestingly, we have seen the premium enjoyed by the Australian 10-year treasury over the US 10-treasury fall to 29 basis points, which is the lowest since 2001. This itself is bearish AUD, but the correlation between the fixed income and FX markets has broken down somewhat of late.
In terms of the ASX 200 we have seen a bit of a pop.
The question now is will they follow this up in November, given that the one bank that has come out stronger (Commonwealth Bank Of Australia - (AX:CBA)) has only passed on 13 basis points, and as things stand the market is pricing another cut at the November meeting at 49%.
The best way to play a falling AUD is not against the USD (in my opinion), as there are still concerns that need to filter through, but long EUR/AUD looks more attractive in the short-term for a move in A$1.5000 and beyond.
