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8 Aug 2014
Speculation of another rate cut from the RBA in due course - TDS
FXStreet (Bali) - Annette Beacher, FX Strategist at TDS, notes that the poor jobs report out of Australia on Thursday, has sparked fresh speculation of another rate cut from the RBA in due course.
Key Quotes
"The swaps market is currently pricing a 40% chance of another 25bp cut by year end, compared with a 30% chance of a cut by March 2015 less than a week ago. Taking a step back from this week’s noise, however, the AUD remains within the broad USD0.92-0.95+ band in place since late March, and is still some way off threatening the 200 day MA of USD0.9180."
"A look at recent trends in three key traditional drivers of the AUD shows plenty of conflicting tail- and headwinds out there. CFTC positioning shows speculative investors maintaining a solid base of net long AUD positions of
around +40k/week since early July. The correlation between net positioning and the AUD (we calculate a correlation of 60% since 2010, rising to 84% since 2011) suggests that the AUD should be trading closer to parity. The RBA is likely relieved that this is not the case."
"Meanwhile, the “global hunt for yield” is a popular explanation for why the AUD is as ‘strong’ as it is. But this argument is not ironclad. A traditional driver of the AUD is the spread between US Treasuries and the Australian 10yr bonds. The spread this week is around +100bp. This is not only low by historical standards but is more traditionally consistent with the AUD trading closer to USD0.75 based on historic correlations. While we are operating in a new world of global low yields (2yr bund yields traded negative today) we doubt that it justifies the near 20 big figure AUD outperformance."
"Despite these conflicting forces, we expect the AUD remain under pressure in the near-to-medium term, targeting USD0.93 for September and USD0.90 by year end."
Key Quotes
"The swaps market is currently pricing a 40% chance of another 25bp cut by year end, compared with a 30% chance of a cut by March 2015 less than a week ago. Taking a step back from this week’s noise, however, the AUD remains within the broad USD0.92-0.95+ band in place since late March, and is still some way off threatening the 200 day MA of USD0.9180."
"A look at recent trends in three key traditional drivers of the AUD shows plenty of conflicting tail- and headwinds out there. CFTC positioning shows speculative investors maintaining a solid base of net long AUD positions of
around +40k/week since early July. The correlation between net positioning and the AUD (we calculate a correlation of 60% since 2010, rising to 84% since 2011) suggests that the AUD should be trading closer to parity. The RBA is likely relieved that this is not the case."
"Meanwhile, the “global hunt for yield” is a popular explanation for why the AUD is as ‘strong’ as it is. But this argument is not ironclad. A traditional driver of the AUD is the spread between US Treasuries and the Australian 10yr bonds. The spread this week is around +100bp. This is not only low by historical standards but is more traditionally consistent with the AUD trading closer to USD0.75 based on historic correlations. While we are operating in a new world of global low yields (2yr bund yields traded negative today) we doubt that it justifies the near 20 big figure AUD outperformance."
"Despite these conflicting forces, we expect the AUD remain under pressure in the near-to-medium term, targeting USD0.93 for September and USD0.90 by year end."