Aussie rate cut on the way?

Lee Hong Wei

Singapore Sales Trader

Pressure has been piling up on the Australian economy lately: the Australian dollar has dipped to a two-month low and a slew of weak economic data has strengthened the odds for an interest rate cut. GDP has slipped to a dismal +0.2% in its latest print (quarter on quarter) against a forecast of +0.5%, its weakest level since December 2016. While the annualised basis growth came in at +2.3% this is still far away from the 3% forecast for this calendar year.

Just earlier this week we saw the Reserve Bank of Australia hold its official cash interest rate at 1.5% for the 28th consecutive meeting, despite a consistently poor showing in economic data, especially in the housing market. Interestingly, the options market was actually pricing in twice the amount of volatility for the last RBA meeting, perhaps indicating that each policy meeting going forward could be a “live event”.

The poor Australian housing data, crippled retail and household spending, and declining asset prices typically lead to consumers becoming more cautious henceforth about their own spending and consumption. The chart below shows that residential house prices have now slid into negative territory on an annualised basis, a persistence of which could lead to repeat of the situation in in 2011-2012 when housing prices were in negative territory YoY for around a year. In the policy minutes that were released in February it was apparent that housing is now a much bigger worry for the RBA than the trade war was in previous meetings.

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Source : Bloomberg – Chart of private consumption vs housing prices. The blue line indicates that housing prices may have peaked in 2017

Have we reached the tipping point for Australia’s cash rate? Out of the 24 economists surveyed last week about their policy expectations, only five said they expected cuts this year, but more are becoming pessimistic about the outlook for Australia’s economy and are consequently downgrading their outlooks. John Hardy, Saxo’s Head of FX Strategy, remains dovish as he doesn’t buy into the hopeful outlook that the RBA had been insisting on. Economist Bill Evans from Westpac predicted two RBA cuts this year – in August and November.

Although the RBA has repeatedly stated that its next rate move could be a hike as opposed to a cut, it has recently shifted its position and now foresees an equal probability of either. The futures market has also repriced a rate cut to see a 30 basis points adjustment from current rate. The probability of a rate cut at the August meeting has now increased from 37% from the start of this week to 61% now after this week’s Australian data releases.

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Source: Bloomberg – Shows spread of 30-day Bank rates futures (Dec) against the overnight cash rate that the market is now pricing slightly more than 1 rate cut now. Y-axis – rate hike/cut counts.

Turning to forex, 0.700 is a solid psychological level for AUDUSD but we may see further downside pressure if economic data continues to be poor, starting with retail sales, which is due for release tomorrow. Otherwise, AUDJPY also looks interesting as it was rejected on multiple occasions on its downtrend channel.

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Source : Bloomberg – Tier 1 data from now until next RBA meeting
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Source : Bloomberg – Longer trend chart of AUDJPY
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