FxWirePro: Snap rallies to short hedge on momentary cushion for AUD as RBA shrugs off feeble GDP but concerns for labour market and current account balance

The Reserve Bank (RBA) left the cash rate unchanged at 1.50% at its board meeting today. The decision was widely expected by markets.

A key stand out was the RBA’s sanguine view in regards to the domestic economy. The RBA has focused on the expectation growth will pick up to above 3 percent, and the transition occurring in the economy away from mining investment as being “almost complete”.

Though jobs growth recently surprised to the upside, the labour market and housing remain key areas of concern, reinforcing an ‘on hold’ decision. Q1 current account is expected to be -0.2bn. The trade surplus rose to $9.0bn in Mar from $4.7bn in Dec, but we expect this to be offset by a wider income deficit of $9.2bn as higher resources returns are in part paid overseas.

Q1 net exports are expected to subtract 0.3ppts from GDP growth, with risks skewed to a larger subtraction. While exports have stalled, imports are now trending higher, with a notable rise in capital imports.

The RBA has previously highlighted two key factors warranting close attention. These were the labour market and the housing market.

The RBA’s upbeat view continues to be predicated on a strengthening economy, which is expected to in turn drive a gradual increase in inflation. There are reasonable factors underpinning this optimism, but there is a risk that growth will undershoot the RBA’s expectations.

Well, these entire aspects factor in AUD exchange rates, the resilience of US equity markets to the distractions of the Trump administration is a positive backdrop for risk-sensitive AUD.

Chinese markets are of course less helpful as the deleveraging push continues, but the uptrend in steel prices suggests potential for recovery in iron ore prices. The rebound in Australian job creation has kept RBA rate cuts at bay. But multi-month, we expect the ongoing rise in US interest rates to chip away at AUDUSD, leaving it around 0.73 by Q3.

Hence, we recommend shorting rallies on hedging grounds, and decide to initiate shorts in futures contracts with near-mid month tenors.

Well, at spot reference: 0.7477, contemplating lingering bearish indications, on hedging grounds we recommend shorting near-mid month futures as the underlying spot FX likely to target southwards 0.73 levels in medium run.

Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.