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20 May 2015
RBA restores dovish backdrop - RBS
FXStreet (Bali) - Brian Mangwiro, Strategist at RBS, writes that the RBA has recently moved to restore a dovish backdrop, one that was briefly abandoned during its early May monetary policy meeting.
Key Quotes
"Market expectations continue to oscillate. Q4 rate cut expectations fell from ‘near certain’ to ~48% probability following an upbeat Statement at the last policy meeting. However, RBA has since moved to restore a dovish backdrop. Dep. Gov. Lowe stated that Board stated that further easing was still possible, also confirmed in the May Board Minutes. The broad take-away from the Board’s rhetoric, Statement on Monetary Policy and Minutes is that low rates are supporting demand, and aiding the anticipated rebalancing away from mining. However, growth is likely to remain below trend, the output gap remains positive and there is scope to loosen policy."
"At this juncture ~68% of a full 25bp cut is priced into Q4’15. There is an implied return to policy tightening in Q3’17; 3 months behind the Bank of Canada."
"Optically, rate cut expectations do not sit well with: (i) the Fed potentially lifting-off in Sep’15; and (ii) China becoming more aggressive towards its growth outlook. On the latter, we have already seen the administration move to support Local Government Financing Vehicles (a reversal of the stance it had taken last year), in addition to lending rate cuts and loosening of commercial banks’ reserve requirement ratios."
"We are medium term AUD/USD bears, mostly premised on a dovish RBA and the slowdown in China. However, we note that AUD FX has so far been well-supported by a weak Dollar, the bounce in commodity prices and steepening AUD front-end interest rate spreads."
Key Quotes
"Market expectations continue to oscillate. Q4 rate cut expectations fell from ‘near certain’ to ~48% probability following an upbeat Statement at the last policy meeting. However, RBA has since moved to restore a dovish backdrop. Dep. Gov. Lowe stated that Board stated that further easing was still possible, also confirmed in the May Board Minutes. The broad take-away from the Board’s rhetoric, Statement on Monetary Policy and Minutes is that low rates are supporting demand, and aiding the anticipated rebalancing away from mining. However, growth is likely to remain below trend, the output gap remains positive and there is scope to loosen policy."
"At this juncture ~68% of a full 25bp cut is priced into Q4’15. There is an implied return to policy tightening in Q3’17; 3 months behind the Bank of Canada."
"Optically, rate cut expectations do not sit well with: (i) the Fed potentially lifting-off in Sep’15; and (ii) China becoming more aggressive towards its growth outlook. On the latter, we have already seen the administration move to support Local Government Financing Vehicles (a reversal of the stance it had taken last year), in addition to lending rate cuts and loosening of commercial banks’ reserve requirement ratios."
"We are medium term AUD/USD bears, mostly premised on a dovish RBA and the slowdown in China. However, we note that AUD FX has so far been well-supported by a weak Dollar, the bounce in commodity prices and steepening AUD front-end interest rate spreads."