“The key to being a good manager is keeping the people who hate me away from those who are still undecided.
– Casey Stengel
Commentary & Analysis
Will The Reserve Bank of Australia Cut Rates Tomorrow?
This would be a good place for the Aussie to take a rest.
AUD/USD Weekly: Resistance at 0.7857 swing and retracement level; momentum fading…
Two headlines today:
- “Australia’s No.3 lender Westpac Banking Corp missed forecasts with a 3 percent rise in first-half cash profit as bad debt charges soared to a six-year high while stricter capital rules pinched shareholder returns, sending its shares skidding.” (Reuters)
- China’s banking regulator is cracking down on financial engineering that Chinese banks have used to disguise trillions of dollars in risky loans as investment products.
[Sent to Black Swan subscribers today]
According to Reuters, “The Reserve Bank of Australia (RBA) is expected to keep its cash rate unchanged at a record low of 2.0 percent at a policy review on May 3, though a growing number of economists expect a cut, an updated Reuters poll released on Monday showed.
Thirty-three out of 51 economists polled expect the RBA to keep its policy rate on hold this week, while 18 see a 25 basis point (bps) reduction following surprisingly low inflation figures for the first quarter.
Last week’s poll had 11 economists out of 50 forecasting a move.
Reserve Bank of Australia Cash Rate: Now at 2.0%…
It is hotly debated whether or not we see a cut tomorrow in rates (release is due out at 12:30 a.m. ET). Here some rationales to suggest a bit of surprise, i.e. a cut:
- The currency seems too high relative to the deteriorating trade account:Australia Month Trade Balance – This would suggest the RBA would be happy with a lower currency value.
- Real Interest Rates are high given the latest price data:Latest monthly data showed deflation, with a -0.2% decline in prices
2-year Australian dollar yields are near 2%; if we add back in the latest negative data that makes real yield grow to 2.2%, which towers over the G-7 countries.
Interestingly, the 2-year Australia – United States yield spread is falling in front of tomorrow’s meeting. Are expectations for a cut rising in real time?
- The currency is being bid up along with commodities prices, which makes sense; but it is heading into technical resistance at swing and retracement levels which come in at 0.7848 and 0.7877, respectively:AUD/USD (0.7628) vs. Iron Ore Futures vs. Crude Oil Futures Daily:
- Sentiment is increasingly bullish, as speculative open interest show Aussie bulls versus bears 69% vs. 31%, based on the latest Commitment of Traders Report dated 4/26/16:
Commercials are heavily short at 86% bearish based on open interest data.
Does any of this matter in what the market is increasingly perceiving as a Fed weak dollar policy that could have some legs? Maybe not; but oil is turning over a bit today. Stay tuned.