RBA leaves rates unchanged

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 […]


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By :  ,  Financial Analyst

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.

 

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