RBA: Expecting rate cut, risk reward short AUD limited - RBS

FXStreet (Bali) - According to Greg Gibbs, FX Strategist at RBS, expects a cut by the RBA on Tuesday, although he adds that the risk-reward from a short AUD position is no longer very attractive.

Key Quotes

"This week promises to be exciting for the AUD with the market undecided on whether the RBA will cut rates, although the market has had a late shift towards seeing a cut as more likely (77% priced in). The tipping point for a shift in expectations appears to be recent strength in the AUD, and renewed slippage in iron ore prices. Chinese economic data have also continued to disappoint."

"We also expect a cut by the RBA on Tuesday, but the risk-reward from a short AUD position is no longer very attractive. We narrowly favour the cut on the basis that this is the same week as the quarterly Statement on Monetary Policy due on Friday, and the RBA has waited three months now since cutting in February. It can justify the cut as another incremental step based on below trend growth forecasts."

"Not cutting will make it appear that the RBA needs further evidence of weaker domestic activity to justify additional rate cuts . This could result in a significant shift in sentiment and boost the AUD quite a bit in a sustained manner (especially if the retail sales and labour report later in the week are solid). The RBA would like to avoid this outcome, thus swaying them to cut this week, even if it could afford to wait a bit longer."

"We prefer a short NZD position in light of the dovish statements by the RBNZ over recent weeks and less risk that the market overreacts to strong New Zealand labour data this week. Any evidence of stalling in the New Zealand economy is likely to see rate cut expectations ratchet up."