RBA rate cut by November, 60% probability

As expected the Reserve Bank Board decided to leave the cash rate unchanged at 2.0%. However, it was very surprising that in the Governor's statement on the Australian dollar, he did not repeat the sentence "Further depreciation seems both likely and necessary". 

Since he introduced that language in May, the AUD has fallen from to . This strategy had proved to be quite successful in 'talking down' the Australian dollar. It was reasonable to expect that the strategy would be repeated given that even at , the AUD was still above most estimates of fair value. 

However, the Governor's statement was scaled back to merely observe that "The Australian dollar is adjusting to the significant declines in key commodity prices". 

"It is reasonable that markets will interpret this comment as indicating that the Bank no longer sees further depreciation of the AUD as "likely and necessary"", says Westpac. 

This perception will impact market pricing for both the AUD and the outlook for interest rates. It is reasonable that a key explanation for markets pricing in around a 60% probability of a rate cut by November is the expectation that the Bank would continue to openly discuss the possibility of rate cuts. 

"A key motivation behind cutting rates would be to further lower the AUD. That motivation now seems to have dissipated", added Westpac.