Ahead of RBA decision

In Australia, the RBA meets on Tuesday at 04:30 GMT. A change in the monetary policy is expected amid softer Q1 inflation and a slowing economy. The RBA’s Statement on Monetary Policy will be published on Friday.

Markets have been factoring in a high probability for the RBA cutting its cash rate by 25 bp at its policy review since the release of Q1 CPI, which came at 0.0% q/q. The CPI y/y rate came in at 1.3%, down sharply from 1.8% y/y in Q4, while underlying CPI was the lowest on record, at 1.4% y/y. The RBA targets underlying CPI at 2%-3%. The trimmed mean inflation rate came in at 1.6% y/y, down on the RBA’s February forecast for this metric to reach 1.8% by June.

The data had catalysed calls for the RBA to cut interest rates with many bank analysts also calling for a follow-up easing by August. The RBA stated in April that a rate cut “would be appropriate” should inflation remain weak. Meanwhile as per the Reuters Eikon terminal below, OIS pricing is now discounting about a 60.81% probability for a 25 bp cut in the cash rate at tomorrow’s RBA policy meeting, and is fully discounting such a move by June. 

The Australian Dollar, was observed to have remained in the range it has been in over the past two years, however it has been seen in a continuous depreciation since January 2018. AUDUSD has dropped over 14% since then, while further losses could suggest a retest of 4-year low area, at the 0.68 territory. Fundamentally, a rate cut could suggest the strengthening of the bearish bias for Aussie.

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Andria Pichidi

Market Analyst

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