RBA is widely expected to cut rates tomorrow – Rabobank

Jane Foley, a senior FX strategist at Rabobank, says the Reserve Bank of Australia (RBA) is widely expected to be the second G10 central bank to have cut policy rates, following the footsteps of RBNZ.

• “We expect AUD/USD to edge lower in the months ahead towards 0.67 on a 6 mth view.
• The surprise election result did initially reel back confidence that the Bank was set to act again in June. However, the candid speech by RBA Governor Lowe on May 21 very quickly underscored the likelihood of a June rate cut.
• The RBA’s main policy rate at 1.5% currently stands well above the rate of several other G10 central banks.  That said, the likelihood that the RBA will embark on a rate cutting cycle tomorrow has opened up the debate of whether the central bank may have to add quantitative easing to its tool-box in the not too distant future.
• In view of Australia’s current account deficit, the AUD has a capacity to be more sensitive than many other G10 currencies to be sensitive to a loss in broad-based risk appetite. The potential for losses in the Aussie in the coming months is accentuated by Australian’s strong trading links with China amid signs of slowing growth in the world’s second-largest economy.
• Given the market growing acceptable that the trade war between the US and China could last in some form for a prolonged period and that the RBA is set to react with rate cuts, we see scope for the AUD to remain vulnerable in the coming months.”