Australian cuts likely postponed

In his Semi Annual Testimony on Monetary Policy last month, Governor Stevens delivered a message that was very much glass half-full in nature. He played down global developments, unlike a number of his global counterparts, he expressed confidence in AU's adjustment and the current setting of monetary policy, saying "we are pretty content where we are right now". 

On numerous occasions, the Governor went out of his way to highlight the positives (and downplay the challenges), above average business conditions, stronger employment growth, a better than expected unemployment rate, improving non-mining activity and the rewards of a lower exchange rate. 

"In many ways it reminds of BoC Governor Poloz. The difference is that Canada is showing stronger signs of transitioning to non-commodity, non-housing driven growth while in AU, further currency weakness is needed over the long-term", stated RBC capital markets.

In the short-term, an on-hold RBA, some boost to sentiment on the back of a new Prime Minister and any recovery in global risk appetite will provide some support for AUD. Offseting that is the risk of a big El Nino event, along with continued soft investment/manufacturing data out of China and the inability of commodity prices to recover.

"Added to that list is the risk of a bigger drawdown in China's reserves. It is likely that China is a much larger holder of AUD assets than the average reserve manager. If Chinese reserve drawdown accelerates, AUD can be expected to trade lower. But mainly, AUD/USD is likely to end Q4 not far from current spot in Q4 (0.69)", says RBC capital markets.