Trader's View - Markets position for RBA cuts

ASX to edge higher

SPI Futures are suggesting that the ASX 200 ought to open around 11 points higher this morning, backing up a busy across Australian financial markets. The solid open, if it materializes, comes thanks to a relatively positive overnight lead from global markets, with the S&P 500 bouncing 0.9% during Wall Street trade, and European indices finishing generally higher too. As one might guess, and using recent history as a guide, it was a risk-friendly trade-war headline that determined the tone of trade. This one told markets that the Trump administration would be delaying sanctions on Chinese mega-company, Huawei.

RBA puts rate cuts back on the agenda

The RBA was the centre of attention for local traders yesterday. And interest rate cuts have been thrown squarely back on the table. The developments came as a double serving yesterday: first, in the release of the RBA’s minutes from their meeting earlier this month; then second, in a speech delivered by Governor Philip Lowe yesterday afternoon. There were details aplenty in each event, but the key takeaway for market participants was clear-enough. The central bank is preparing the market for a likely cut to the overnight cash rate next month, and perhaps even another shortly after that.

As clear as a central banker can get

Of course, Governor Lowe and the RBA’s description of their policy bias wasn’t so blunt. But given central bankers proclivity for positioning financial markets for a rate-cut ahead of time, it was deemed explicit enough. The language in focus from the minutes was the statement that in the event labour market conditions did not improve, that in such circumstances “a decrease in the cash rate would likely be appropriate”. While Governor Lowe’s speech, the language that truly captured attention was the statement that the RBA would “consider the case for lower interest rates” at its next monetary policy meeting.

Markets reprice rate-cut expectations

The price reactions in markets to the RBA’s policy minutes and Governor Lowe’s speech were distinct – especially as it applies to the latter. Having unwound somewhat yesterday as-a-result of the Coalition’s surprise election victory, interest rate markets are once again implying more than two cuts from the RBA by years end. The first full cut has been baked in for July’s meeting, but the real point of contention is what the likeliest out come will be for the June. Markets were squarely fifty-fifty yesterday morning, however that’s leapt back out to around 70-30 – right where it was before the weekend’s election.

Aussie Dollar dips again

That dynamic was not a positive one for the Australian Dollar. It too is eyeing its pre-election levels, breaking into the 0.6800 handle once more after Governor Lowe’s speech. The AUD/USD looks poised to once more challenge new lows, compelled by widening yielding differentials between US Treasuries and Australian Government Bonds, and with momentum strongly too the downside. There are technical signs that the A-Dollar is becoming oversold, judging by the RSI and falling wedge pattern visible on the daily-charts. But what ever pop may come from this set-up looks likely to be fleeting, before the A-Dollar continues its slow grind lower.

APRA also moves to support market

APRA has also leapt in to throw its support behind the domestic economy yesterday. It announced that it would removing one of the major barriers implemented in 2017 to cool the Australian housing market, by removing the 7% mandated floor that new borrowers’ had to assessed on for loan serviceability. In what’s being described as a scripted and coordinated effort between APRA and the RBA, the move speaks of a regulatory regime concerned about the health of the housing market and Australian households. Economic activity is slowing, and policymakers are pulling at the well-worn levers to restart the economic engine.

ASX cracks 6500

Australian equities welcomed the news. While the gains were only a shadow of those experienced Monday, the trio of risk-positive stories proved enough to drive the ASX 200 throughout yesterday. Naturally, it was bank shares and the real estate sector that led the charge, with the former adding another 26 points to the index. The market now sits only points shy of the big-6500 mark – a new 11-year high, that bellies, generally speaking, the weaker global economic outlook. A deterioration in the global economy could erase this rapid rally; however, with the market so bullish miners and banks, there remains fuel for further upside.