Our view over the past few weeks was that a November cut was always a 50% chance and if the RBA did not move in November the next cut would be February. This was documented in a note we wrote two weeks ago, found here. It’s not a question of should the RBA be cutting or not – for us today’s decision to postpone is merely an opportunity to buy more time and evaluate what type of response is necessary in February. We still think the next move is down by 25 basis points.
The market prior to today’s announcement has widely taken a November cut for granted, the RBA has moved either way every year in November since 2006. Moving again today would have been too predictable and the central bank wants to maintain some element of surprise. But we don’t think this is the primary motivation. With inflation within the target band and the full effect of last month’s cut yet to flow through the market completely, the RBA did not see an immediate reason to move today. That immediacy is the key issue here.
Bottom line: The Australian dollar moved above US$1.04 on the news and many forex traders were already widely expecting an outcome more favorable than what the economist survey were suggesting. We think the Australian dollar is likely to continue finding support particularly after the US election result is declared tomorrow evening Asia time. The big question will come early next year when the US fiscal situation hits center stage and the world starts to contemplate new problems which haven’t gone away.
If trading through the busy Christmas period doesn’t flatter the RBA and domestic demand remains soft, then the prospect of a quick and immediate need to move in February will put serious pressure on the A$. For the time being, we see solid support at the US$ 1.0326 level.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.