FxWirePro: AUD/USD’s gains momentary owing to Fed’s deferral, major bear trend to prevail on RBA rate cut hopes

The Antipodes (Australian and New Zealand dollars) rose against their U.S. counterpart on Thursday and gains extended even during early hours of today, after the Federal Reserve’s decision to leave its monetary policy unchanged dampened demand for the greenback.

However, on the contrary, we also reckon that the risks around the AUD would factor into the monetary policy decision by the RBA which is scheduled on Tuesday 2nd August. A 25bp rate cut to a new record low of 1.5% is pretty much on the cards given inflation is likely to stay lower for an extended period and since the labour market has lost momentum this year.

The RBA would update its forecast outlook in the Statement on Monetary Policy on Friday 5 August. We expect the RBA would continue to forecast modest growth and inflation persistently below the 2.5% midpoint of the target range.

Even though we expect a rate cut from the RBA next week, given market pricing, its impact on the AUD could be negligible. For a more sustained sell-off, we would need to see the RBA signalling that the cash rate was set to push below 1.5% or for the recent liquidity-fuelled rally to fail on some disappointment from the BoE or BoJ.

This valuation wedge continues to be driven by liquidity flows. This can be seen in the fact that while the AUD/USD is ranging, against European crosses momentum is a significant driver.

Over the longer-term, we expect AU growth to remain subpar and AUD to drift lower. There are a few key things to watch in H2 of 2016. Governor Stevens retires in Sept 2016 while AU’s current account deficit is also worth tracking.