AUD Analysis – 4th of May

Jarratt Davis

Special Consultant to the FPA
Our bias for the AUD has turned bearish since the substantial decline in CPI. Although the May 3 RBA statement made no explicit mention of further cuts, it goes without saying that an environment of persistently low inflation will force the central bank to cut further in an attempt to drive inflation back to target. The next CPI release will not come until July 27. In the meantime our sentiment bias on the AUD will be driven by other tier one data, such as jobs and growth, and also RBA communications, developments in the Chinese economy and of course, any major fluctuations in key commodity prices.

AUD Update

Interest Rate

Official Cash Rate: 1.75%

Last Change: May 3, 2016 (2.00%)

Expected Future Change: 30-Day Interbank Cash Rate Futures price 13% chance of cut

Next release: June 7


Inflation Target: 2-3%

Period: Q1 2016

CPI: 1.3% Prior: 1.7%

Trimmed Mean CPI: 1.7% Prior: 2.1%

Next Release: July 27


Period: March

Employment Change: 26,100 Expected: 18,000

Unemployment Rate: 5.7% Expected: 5.8%

Next Release: May 19


Period: 2015

GDP: 3.0% Expected: 2.5%

Next Release: May 31

The Reserve Bank of Australia cut the Official Cash Rate from 2.00% to 1.75% on May 3, following subdued Q1 inflation. The Bank last cut rates on May 6, 2015 and since maintained that a move lower in inflation would be the catalyst for further rate reduction. The last RBA statement (April 5) that was released prior to the recent cut stated that, “Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.” This sentence, and similar ones, had been repeated in official RBA communications for the best part of twelve months. As such, it should have come as no surprise when the RBA cut the interest rate on May 3, following first quarter inflation readings which saw underlying inflation at its lowest level on record. Especially given that CPI data is released only quarterly, there was no chance that the RBA was going to wait another three months to examine inflation again. Despite this seemingly obvious forecast, 15 out of 27 economists polled by Bloomberg expected the RBA to remain on hold at the May 3 meeting. Additionally, 30-Day Interbank Cash Rate Futures were pricing only a slightly more than 50% chance of a cut, and the market even bought the AUD during the Asia-Pacific session leading into the announcement, with AUDUSD rallying 60 pips. Such blatant mispricing speaks volumes to discredit baseless academic theories such as the ‘efficient market hypothesis’, and merely serves to provide fantastic trading opportunities for the well-studied speculator. Indeed, AUDUSD declined over 235 pips on the day following the rate decision.

Inflation data for Q1 missed estimates across the board, showing deflation for the first time in seven years and the lowest core inflation on record. Trimmed Mean CPI printed at 1.7% y/y, below expectations of 2.0%. For the quarter, Trimmed Mean CPI rose only 0.2% versus expectations of 0.5%. Headline CPI printed at 1.3% y/y versus expectation of 1.8%, and at -0.2% q/q versus 0.3% expected. All data points were below even the lowest of analyst expectations, and consequently prompted the RBA to cut rates.

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