FX Flash
Group Economics Macro & Financial Markets Research
02 August 2016
AUD declines after RBA cuts OCR by 25bp to 1.5% AUD declines after RBA cuts OCR by 25bp to 1.5%
Roy Teo
RBA likely to follow up with another 25bp rate cut in November
Senior FX Strategist Tel: +65 6597 8616
AUD likely to decline to 0.72-0.73 in the coming months
roy.teo@sg.abnamro.com
AUD declines after RBA cuts OCR by 25bp to 1.5% As expected the Reserve Bank of Australia (RBA) lowered the Official Cash Rate (OCR) by 25bp to 1.50% today. The Australian dollar (AUD) fell to 0.75 against the US dollar as today’s rate cut decision was only about 70% priced in by financial markets. The RBA noted that the global economy is continuing to grow at a lower than average pace. The outlook for the labour market remains mixed and inflation is likely to remain quite low. The RBA also seems less concerned on the housing market with supervisory measures strengthening lending standards. Hence the likelihood of lower interest rates exacerbating risks in the housing market has diminished. Core inflation to remain weak
A 25bp rate cut in November is not fully priced in
%
%
2.00
4.0 3.5
1.50
3.0 2.5
1.00
2.0 1.5
0.50
1.0 0.5 Jan-10
0.00 Apr-11
Jul-12
Inflation gauge YoY% (rhs)
Oct-13
Jan-15
Sep-16
Apr-16
CPI trimmed mean YoY%
Source: Melbourne Institute of Applied Economic and Social Research, ABS
ABN
Oct-16
Nov-16
Dec-16
Cash rate futures implied OCR
Source: Bloomberg
RBA likely to follow up with another 25bp rate cut in November We expect the RBA to follow up with another 25bp rate cut later this year in November to bring the OCR to 1.25%. In our view, core inflation is expected to remain below the RBA’s 2-3% target range in the second half of this year. Though the unemployment rate has
Insights.abnamro.nl/en
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FX Flash - AUD declines after RBA cuts OCR by 25bp to 1.5% - 02 August 2016
remained below 6% since the start of this year, job growth has slowed. In fact, full time jobs have declined by 19k in the first six months of this year. We expect subdued wage growth and slower house price gains to weigh on domestic inflation. A study done by the RBA in 2014 stated that a 10% depreciation in the AUD trade weighted index (TWI) increases service export volume by 13% and inflation by 0.25-0.5% after about 2 years. We expect a 7% appreciation in the AUD TWI since the third quarter of 2015 to have a similar negative impact on exports and inflation. We expect the AUD to decline to around 0.72-0.73 in the coming months.
Find out more about Group Economics at: https://insights.abnamro.nl/en/
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FX Flash - AUD declines after RBA cuts OCR by 25bp to 1.5% - 02 August 2016