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Australian Dollar Tipped to Rally on Likely RBA Pause of Rate Cutting Cycle


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- AUD buoyed Monday by a softer White House trade stance.  

- But could rally further if RBA pauses cutting cycle, says ING.

- As market still prices more easing this year, but upside limited.  

- And some doubt AUD can sustain gains beyond short-term.

- Rabobank tips more RBA cuts, fresh AUD losses, for 2020.

The Australian Dollar clung to recent gains in the first session of the new week and could advance further over the coming days if the Reserve Bank of Australia (RBA) signals a pause in its rate cutting cycle Tuesday, according to ING Group, although upside is limited by technical factors on the charts.

Australia's Dollar has been buoyed of late by a new ceasefire in the trade war between the U.S. and China as well as a modest increase in inflation on the domestic side, which was seen last week as making it more likely the RBA will opt to leave the cash rate unchanged at 0.75% at 03:30 am London time on Tuesday. However, prospect of a fourth 2019 cut has not been fully priced out because the market-implied cash rate for December was still 7 basis points below the current one on Monday. 

Pricing in the overnight-index-swap (OIS) market implied a December 03 cash rate of 0.68% on Monday and a February 04 cash rate of 0.62%, although both of those numbers would likely rise on Tuesday if the RBA suggested it might wait for more than month before slashing rates again, which would have positive implications for the Australian Dollar. That scenario is exactly the scenario envisaged by the strategy team at ING for this week.

"Our base case is that the RBA will refrain from any more cuts at least through the end of 2019, so we would not be surprised to see Governor Lowe providing some indications of a more extended pause in the easing cycle," says ING's Francesco Pesole. "We think that a further stabilisation in risk sentiment and the possibility of a hawkish shift by the RBA suggests that the balance is skewed to the upside for AUD/USD in the next week."

Above: AUD/USD rate shown at 4-hour intervals alongside the Pound-to-Australian-Dollar rate (orange line, left axis).

Pesole tips a resilient performance from Australian Dollar this week but says the 200-day moving-average of prices, which is currently located around 0.6955 on the charts, will likely prove a too tall an order for the antipodean currency. Thereafter, the AUD/USD rate is expected to retreat back toward 0.6750 once this week's RBA-induced boost has faded.

The RBA has cut rates three times this year in an effort to lift growth and inflation although many in the market expect it to cut the cash rate again, to a new record low of 0.5%, before long. The bank is attempting to coax the economy to 'full employment' in the hope of seeing rising wage packets that will eventually lead to higher inflation, which means the monthly jobs numbers will be important in the quarters ahead. 

"While AUD/USD may continue to find support on a 1 to 3 month view, we are sceptical that the optimism will last. We see scope for further RBA policy moves this cycle and expect AUD/USD to be trading at lower levels by the middle of next year," says Jane Foley, a senior FX strategist at Rabobank

The RBA hinted last month it could continue cutting rates until it achieves 'full employment', which is a hypothetical rate that is thought to be necessary for the generation of upward wage and inflation pressures. Lacklustre wage growth has limited the expansion of cosumer spending and had a suppressive effect on inflation as measured by the consumer price index, which is a problem for the RBA because it's obliged to keep price growth within the 2%-to-3% band.

Above: AUD/USD rate shown at daily intervals alongside the Pound-to-Australian-Dollar rate (orange line, left axis).

Foley says the RBA will be forced to cut its cash rate again in the first half of 2020 and that this will likely see the Aussie Dollar reach new lows against its U.S. rival over the next six months, with her end-period forecast of 0.66. And finanical markets are not fully prepared for another cut that soon, which means one would be bad news for the Aussie, because pricing in the OIS market implied on Monday a June 02, 2020 cash rate of 0.58%. That's above the 0.50% that would prevail after the next cut.  

"Encouraging news flow on the US-China trade relations front has not yet left its mark on AUD and NZD positioning, with the two currencies still the biggest speculative shorts in the G10 space," Pesole says. "This week’s Reserve Bank of Australia policy announcement may be pivotal for both antipodean currencies: should it turn out to be a positive catalyst for the currencies, their eneasy truce between the U.S. and China has lifted the Aussie and other risk sensitive currencies since an October 11 agreement averted an increasxtensive net short positioning suggests good potential for short-term rallies."

An uneasy truce between the U.S. and China has lifted the Aussie and other risk sensitive currencies since an October 11 agreement averted an increase in U.S. tariffs that was planned for mid-month. Commerce Secretary Wilbur Ross talked up at the weekend, the chances of the verbal agreement between President Donald Trump and Vice Premiere  Liu He being inked in a more formal manner in the weeks ahead. He also said the White House may not  after all, impose higher tariffs on EU car exports. 

However, the Aussie has also been aided by developments at the Federal Reserve (Fed), which has now cut U.S. interest rates just as many times as the RBA, with the third reduction of borrowing costs being delivered last Thursday. That's prevented the differential between benchmark Aussie and U.S. rates from becoming any more disadvantageous to the Antipodean currency even though the RBA has also cut three times. 

 

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