FYI | May 30 2012
Asia Session: The RBA loves to play the waiting game, so why not wait until the June 17 election in Greece before cutting the OCR
Chris Tedder, Research Analyst FOREX.com
It was AUD’s turn to sink today, with the commodity currency getting hammered on the back of weak retail sales data from Australia. AUDUSD was sent plummeting through 0.9800 immediately after the Australian data was released. The pair managed to regain some ground following the sell-off, but gains for commodity currencies and risk assets were limited by negative sentiment stemming from Europe, in particular the Spanish banking sector.
Australian retail sales contracted for the first time this year, with the headline figure printing at -0.2%, significantly lower than the +0.9% figure from the prior month and the anticipated +0.2% rise this month. Some commentators are saying this recent batch of data is just statistics catching up with what a lot of people having been saying for a while – the Australia retail sector is under immense pressure due to a lack of interest from consumers. Thus, they are suggesting the RBA will move to ease monetary policy next week.
Current market pricing suggests there is around an 87% chance of the RBA cutting 75 bps from the official cash rate (OCR) by July. We think cuts of this magnitude are too extreme, especially given the fact the RBA cut rates by 50 bps last time around. Also, if the RBA cut the OCR by 75 bps it would bring it back down to its lowest level ever, a level we haven’t seen the early stages of the financial crisis, which is curious considering AUD and the ASX are significantly higher than they were at that time.
Overall, we are not so sure the RBA will cut the official cash rate next week, let alone cut it by 50 or 75 bps. The budget is aimed at reducing the burden on most consumers, thus it takes some of the pressure off the RBA to reduce rates. Also, there is a lot political uncertainty in Greece, and the end result may be a Greek exit from the Euro which will likely be very harmful to European sentiment, at least in the short-term. Hence, the board may wait until after the Greek election on June 17 before acting, as they have proven their willingness to wait in the past.
Hence, we think there may be some upside potential for AUD, but only in the near-term. Current interbank pricing suggests that more than 25 bps cut is currently priced in, thus there is upside potential for AUD if the bank decides not to cut the OCR or if they only cut by 25 bps. In any case, any upside movement may be capped by resistance levels around parity.
Elsewhere, EURUSD held below 1.2500 and slipped to a two-year low. And, given the potential for more risk-negative news from Europe, in particular Spain, we think there is more downside potential for the pair in coming days, weeks and months.
Equity markets in Asia and commodity were mostly lower. The ASX200 and Nikkei 225 are currently down by around 0.57% and 0.87% respectively. XAUUSD slipped through a support level around 1500.00.
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