After some 684 days since the last 25bp rate cut from the Reserve Bank, we have seen the bank meet consensus expectations and take the cash rate down to 1.25%.
Considering as the swaps market had priced in 70bp of cuts (nearly three cuts) over the coming 12 months, and considering the lack of determination to meet the markets dovish thought-process in this statement, we could argue the 17p rally in AUDUSD into 0.6993 and a 2bp rise to 1.14% in 3-year Aussie bond yields were a tad lightweight. Especially given the record AUD short position held by asset managers. I personally felt a non-committal statement could have seen a move above the 70-handle, but that hasn’t happened, and we have actually seen traders fade the modest strength. Let’s see how Europe trade this, but it would not surprise to see AUDUSD above 70c when we walk into work tomorrow.
Governor Lowe speaks at 19:30aest and we may get more meat on the bone here to work with, but what the statement has done though is provide flexibility and now they have cut to 1.25% and met the conditions and roadmap by which Dr Lowe laid out to ease, the RBA have gained an element of credibility. Or, at least, mitigated a wave of condemnation had they not eased. The governor simply can’t give us the trigger points, we see these variables play out and subsequently price in 100% chance of a cut, for them then not deliver. However, the markets feel the bank ease again and continue to watch the labour market (next employment print is on 16 June), housing metric (auction rates, credit, prices), and, of course, external factors that can impact broad financial conditions and semantics, such as Trump taking on all comers.
Housing is an incredibly interesting variable and a far slower moving beast than FX, rates and equity, but should we see consistent stabilisation of house prices, then we need to re-think this major domestic tail risk for the economy and markets. The re-election of the Morrison government, and the potential roll-out of a loan deposit scheme, and certainty around a continuation of negative gearing can now be married with monetary stimulus from the central bank. And, with it the potential for mortgage rates to eventually head below 3%. That said, ANZ has passed on 18bp (of the 25bp) and naturally faced the scorn of Josh Frydenberg, while CBA has picked up some needed PR and delivered the 25bp.
Changes from APRA to remove the minimum 7% serviceability buffer will also increase the maximum borrowing capacity, and we are dealt with the holy trinity of housing stabilisers. We keep our eyes on auction clearance rates and upcoming house price index.
We watch for tomorrows Q1 GDP print, but it will be weak, and if it comes in above 0.4% QoQ we’d be surprised – and this in itself will result in the lowest year-on-year pace since Q3 2009. It seems as though this will fail to be a volatility event for markets, although a strong number could cement the support above 70c. Consider that the onus falls back on the US, with the market now saying that China or Europe is no longer the problem – Trump’s policies are going to need the biggest monetary response from the Fed or any central bank and that makes the US the number one global macro issue now
Published by Chris Weston, Head of Research, Pepperstone