Aussie’s Brief Reprieve Ahead of RBA

<p>The damaged Aussie attempts some stabilization after a 14% decline over the last 2 months but little has changed in the way of fundamentals. Last […]</p>

The damaged Aussie attempts some stabilization after a 14% decline over the last 2 months but little has changed in the way of fundamentals. Last week’s IMF’s report warning of capital flight out of the Aussie, the prior week’s rebound in Chinese money market rates, and the indications from the Federal Reserve suggesting an earlier  than anticipated tapering of asset purchases are all negatives against the once darling of the carry trade.

Tonight’s RBA decision (Tuesday  0:45 ET, 5:45 BST) should maintain expectations for ongoing low rates (lowest since 1960), underlying the case for going against the Aussie. We agree with the 25 of 28 Bloomberg estimates, calling for rates to remain unchanged at 2.75%, with 3 expecting a 25-bp cut. More easing is anticipated in August.

AUD is already the worst performer this year, down 11% against the USD, underperforming even the Japanese yen.

But from a tactical view, Aussie may show a little more stability before resuming losses. This week’s set of policy meetings from the Reserve Bank of Australia, Bank of England, and European Central Bank could well boost their currencies as these will hold off from any additional easing measures in the immediate term. The RBA will likely adopt a wait-&-see stance in today’s policy statement, for the deep cut in rates to filer through, rather than deliver fresh assault from the policy front to the already damaged currency. The BoE is unlikely to announce any fresh easing measures on the first MPC meeting of the new governor Carney, as it will use the August inflation report and MPC meetings to communicate Carney’s manifesto with regards to any change in forward guidance and growth-oriented policy. Finally, ECB’s president Draghi is expected to maintain the door open for further rate cuts, but will acknowledge that time is by his side before committing to fresh easing.

We continue to await the 0.90 objective communicated in our May 31st piece, before the 0.8890 target re-merges after a 3-year absence.  Any relief rally from the confirmation of keeping rates unchanged and brief outflows from USD later in week is likely to recall the 0.9350s before selling resumes towards 0.89.

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