Aussie Activity Could Increase Yet Rate Cuts Still Likely, AUDUSD Flat
THE TAKEAWAY: Westpac Leading index points toward increased activity > Westpac Bank research suggests however, flagging conditions warrant further RBA rate cuts > Aussie Flat
The Aussie currency was little changed as the Australian Westpac Leading indicator came across the wires today at +0.5 percent hinting a slight uptick in economic activity is to be expected over the coming months. However, according to recent Westpac Bank research another 25 basis point reduction to the cash rate by the RBA is expected during the November policy meeting on the backdrop of “global uncertainty”, “softening domestic growth”, a “weak” labor market and “dormant” inflation. Moreover, Westpac Bank projects the RBA to bring rates down to 2.75 percent by the early part of 2013. Broad market expectations as measured by overnight index swaps compiled by Credit Suisse, would suggest a 76 percent probability of a 25 basis point reduction to rates by the RBA in November which is firmly in-line with the bank’s projections.
Market participants appear to have set the bar high for further cuts which may exert downward pressure on the high yielding currency as interest earned on carry becomes relatively less attractive.