RBA: Rate cut in June and August?

Robert Rennie, analyst at Westpac, suggests that Westpac is now forecasting a rate cut from RBA in June and August, versus August and November.

Key Quotes

“Given the clear guidance in the RBA minutes from the May meeting released today that "in the scenario where there was no further improvement in the labour market in the period ahead ... a decrease in the cash rate would likely be appropriate" and then in today's Lowe speech that "at our meeting in two weeks' time, we will consider the case for lower interest rates", its arguably the case that the FX market would be surprised if the RBA does not deliver a rate cut on June 4.”

“Our fair value framework continues to be helpful in trying to understand what this means for the A$, especially given the backdrop of sharply rising iron ore prices and recovering iron ore export volumes. Even with the highest level for iron ore back to May 2014, the midpoint of our fair value model has dropped by 2.75% in the last 5 weeks (0.7220 down to 0.7018) as markets have moved from circa 25% priced to circa 90% priced for a cut in June.”

“Given the backdrop of the recent moves by Trump to 'clear the decks' on trade/ tension with Europe and Japan but at the same time 'double down' on pressure on China, we remain of the view that the A$ should continue to be capped by the midpoint of our fair value model. This strategy has served us well so far this year - with the A$ not closing above the mid-point since early December. This then argues that the A$ should remain capped on strength towards 0.70 and we remain focussed on further weakness down to our long held 0.68 target.”

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