FX Flash – AUD range trading to persist

by: Roy Teo

  • RBA minutes signal wait and see stance
  • Low volatility in the AUD likely to persist…
  • …weaker AUD likely

 

FX-Flash-AUD-range-trading-to-persist-18-Apr-17.pdf (50 KB)
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RBA minutes signal wait and see stance

Earlier today, the RBA minutes reinforced our view that the RBA is likely to keep the Official Cash Rate (OCR) unchanged this year. The RBA noted that the labour market had been weaker than expected and that spare capacity had contributed to low wage growth outcomes. The RBA also acknowledged that forward looking indicators had been suggesting more positive employment outlook than had been realised for some time. However given ongoing concerns that housing credit is expanding at a faster pace than household income, the scope for more monetary stimulus remain limited, in our view. In addition, underlying inflation has troughed and is expected to rise gradually. Finally, the RBA has preliminary assessed that the overall impact on consumer prices and domestic growth was not expected to be large following Cyclone Debbie in Queensland and floods in Northern New South Wales.

 

Low volatility in the AUD likely to persist

The one month realized volatility in the AUD has declined to the lowest level since late 2014. At the time of writing, financial markets are pricing in that the AUD is likely to trade approximately within a 3 cent range of 0.74-0.77 against the USD over the next one month. This is probably a reflection that financial markets expect the RBA to keep the OCR unchanged this year and that the US Federal Reserve is unlikely to tighten monetary policy in the next FOMC meeting on 3 May. Overnight, the USD recovered modestly after US Treasury Secretary Mnuchin said that dollar strength is good over long periods of time. However upside in the dollar was capped as US Democrats seem unwilling to cooperate on any rewriting of the tax code unless US President Trump release his tax returns. Mnuchin also acknowledged that the goal of getting the tax plan signed by August this year was not realistic at this point.

 

Weaker AUD likely

Looking further ahead, we expect a slightly weaker AUD given that iron ore futures have declined by almost 30% since hitting a peak earlier this year in February. Last but not least, the Fed funds futures are pricing only a 50% chance that the Fed will raise interest rates by 25bp in June, less optimistic than our base case scenario.