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The Reserve Bank of Australia is the first major central bank of the G10 countries to cut its key rate, thus confirming the end of normalization: this morning by 25bp to 1.25%. The rate cut had basically been announced, as Central Bank Governor Philip Lowe had signaled in a speech on 21st May that at its June meeting the Board would consider the case for lower interest rates.
According to Lowe back then, the development of employment and inflation would be the main reasons. It could be that an even lower unemployment rate (currently 5%) was needed to exert upward pressure on inflation, according to Lowe back in May. After all, inflation disappointed in the first quarter with a decline to 1.3%, well below the inflation target of 2-3%. The reasoning remained unchanged in this morning’s statement.
The FX market welcomes the RBA’s decision as the AUD is appreciating. That illustrates: the market is demanding lower interest rates as a means of protecting against possible economic weakness. As a result, the pressure on the Fed to cut rates is mounting.
Trade recommendations:
AUDJPY drags price dips are going in a narrow range today, fell down to 75.050 levels (about -0.12%) as the weakness is imminent not only due to RBA but also the lingering trade-war tensions between US-China.
Accordingly, put switch options strategy has already been advocated for this pair in our previous post, we wish to uphold the same strategy for now.
Long a 6w 76.75 AUDJPY put, short a 6w 110 USDJPY put. Paid net premium of 25bp at the end of April 25th. Marked at 70bps.
Stay short AUDUSD from 0.7090 March 4th. Marked at 1.28%. Courtesy: JPM & Commerzbank
Currency Strength Index: FxWirePro's hourly AUD is flashing at 48 levels (bullish), while hourly JPY spot index is at -2 levels (which is neutral) while articulating at (10:12 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
