We expect the RBA to cut interest rates at the 2 August meeting – currently just a 13bp cut is priced in. We expect Wednesday’s Q2 CPI number to come in at 1.1% y-o-y – in line with consensus, but a fall from 1.3% in Q1. We expect this to push the RBA to cut the cash rate next week. The RBA continues to forecast below-average trading-partner growth and noted that the pace and quality of growth in China is deteriorating. The July minutes showed that the RBA seemed less confident in the domestic growth outlook and very confident that inflation will stay low.
Finally, leveraged funds’ long positioning in AUD continued to grow for a second consecutive week (long positions now at 44% of active contracts). Asset managers also remain long AUD. A weak inflation number could squeeze long positions and send AUD lower.
AUD/USD currently trades at 0.7476, and we believe the cross could trade towards 0.735, with a stop at 0.755. Alternatively, short AUD/NZD could be an attractive way to trade our RBA view, with an RBNZ cut in August now almost fully priced.