From the FXWW Chatroom – Markets may be leaning too dovish into the upcoming RBA decision. Specifically, it may be too soon for the RBA to flag rises in market interest rates in its policy statement awaiting follow through from a broader range of domestic banks and there is likewise too much uncertainty on potential pass through from recent political developments for policymakers to dwell on this factor. With underlying economic data flow showing strength both relative to expectations and on an absolute basis since the last policy decision, the terms of trade modestly higher and trade-weighted AUD lower, the likelihood may be for a little changed policy statement and for Governor Lowe to reiterate that the Bank has significant scope for patience before moving rates in his later comments. Investors risk being disappointed should the Governor not move to flag risk that the next move in rates may be in either direction, implying increased risk for a cut in line with the ‘truly’ neutral bias of the RBNZ.
· We believe this would read hawkish relative to market expectations and, as such, could drive a temporary relief rally in AUD. Interest rate expectations have declined since the last RBA decision, with expectations for June ’19 about 6bps lower than their levels from the previous meeting. Expectations further out the curve have declined even more steeply. Our flow analysis shows a move to net AUD selling across the leveraged and real money sector recently, supporting the view that sentiment approaching the RBA decision has deteriorated.
· We believe this would read hawkish relative to market expectations and, as such, could drive a temporary relief rally in AUD. Interest rate expectations have declined since the last RBA decision, with expectations for June ’19 about 6bps lower than their levels from the previous meeting. Expectations further out the curve have declined even more steeply. Our flow analysis shows a move to net AUD selling across the leveraged and real money sector recently, supporting the view that sentiment approaching the RBA decision has deteriorated.
· We believe JPY is an attractive vehicle for tactical AUD longs, because we see scope for somewhat stronger risk appetite at the start of the week. The recent uptick in USDCNY began to reverse at the end of last week and given recent JPY buying on contraction in risk appetite, any broader pause in EM strains is likely to weigh on the currency. Given the US holiday, noise around US politics/trade policy may be more subdued to start the week.
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