Trading the RBA - TDS

Research Team at TDS, suggests that should the RBA leave its options open to cut rates, then we will look to enter OIS flatteners with suggested entry levels, short July / long Nov at –15 ticks (curr –17) and short July / long Feb at –22 ticks ( curr -24.5)

Key Quotes

“TD expects the RBA to keep the cash rate on hold at 1.75%. The RBA has no reason to cut rates back-to back. Activity data is robust and financial conditions are not restrictive.

Q1 GDP came in pretty much as per the RBA’s May SoMP point estimate for June. Accordingly we expect the RBA to look past last week’s strong number, but the market will be seeking confirmation of this in tomorrow’s statement.

The market will also attempt to gauge the Bank’s commitment to cut rates further. Does the Bank: Þ Reintroduce an explicit easing bias? In March 2015 the RBA stated “Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target.

The Board will further assess the case for such action at forthcoming meetings” and reiterate “Continued low inflation would provide scope for easier policy…” Mkt reaction: OIS curve to flatten, AUD steady. Þ Leave its options open to cut rates (wait and see) ? We think this would be a shock. The Bank did this in June 2015 stating “Information on economic and financial conditions to be received over the period ahead will inform the Board’s assessment of the outlook and hence the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.” Mkt reaction: Market scales back easing expectations, Aug to 40%, steeper OIS curve, AUD to US$0.75+

Price data since the May SoMP has been weak - annual wage growth hit a record low as per the Q1 Wage Cost Index, Q1 GDP revealed weak price pressures with weak deflators & unit labour costs and this morning The Melbourne Institute Inflation Gauge Trimmed Mean print fell to 1%/yr, with annual tradable and non tradables measures dropping further. This should keep a RBA August cut on the table.”