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Following the very weak Q1 CPI release of Australia, the market has re-calibrated its RBA expectations and pushed 3yr swap rates to new record lows quicker than even we had expected under our expectation that the RBA would cut rates in August and November. Market pricing suggests that every RBA meeting is live and that will keep 3yr swap rates probing new low levels.
The RBA quarterly Statement on Monetary Policy contained modest downgrades to economic forecasts, and we believe further downward revisions to forecasts will be forthcoming in the August SoMP. We now expect 25bp cuts in August and November.
This week delivered one from two – contrary to our expectation, the RBA left rates unchanged. The RBNZ delivered a 25bp cut as forecast.
Despite the noise this week, the end game hasn’t changed for AUD front end rates. Cuts are coming, and the longer the RBA leaves it, the more easing that will be required. Receive AUD 6Mx6M OIS.
The timing of rate cuts is unclear. But Jun-19 vs. Aug-19 RBA OIS flatteners offer attractive risk/reward if labor force dynamics play out as we forecast (unemployment rate of 5.2% by June 2019). Courtesy: Westpac
Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards -110 levels (which is highly bearish), while hourly USD spot index was at 122 (highly bullish) while articulating (at 09:41 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
