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Commentary & Analysis
Will The Reserve Bank of Australia Cut Rates Tomorrow?
This would be a good place for the Aussie to take a rest.
AUD/USD Weekly: Resistance at 0.7857 swing and retracement level; momentum fading…
Two headlines today:
1) “Australia's No.3 lender Westpac Banking Corp missed forecasts with a 3 percent rise in first-half cash profit as bad debt charges soared to a six-year high while stricter capital rules pinched shareholder returns, sending its shares skidding.” (Reuters)
2) China’s banking regulator is cracking down on financial engineering that Chinese banks have used to disguise trillions of dollars in risky loans as investment products.
[Sent to Black Swan subscribers today]
According to Reuters, “The Reserve Bank of Australia (RBA) is expected to keep its cash rate unchanged at a record low of 2.0 percent at a policy review on May 3, though a growing number of economists expect a cut, an updated Reuters poll released on Monday showed.
Thirty-three out of 51 economists polled expect the RBA to keep its policy rate on hold this week, while 18 see a 25 basis point (bps) reduction following surprisingly low inflation figures for the first quarter.
Last week's poll had 11 economists out of 50 forecasting a move.
Reserve Bank of Australia Cash Rate: Now at 2.0%...
It is hotly debated whether or not we see a cut tomorrow in rates (release is due out at 12:30 a.m. ET). Here some rationales to suggest a bit of surprise, i.e. a cut:
1) The currency seems too high relative to the deteriorating trade account:
Australia Month Trade Balance – This would suggest the RBA would be happy with a lower currency value.
2) Real Interest Rates are high given the latest price data:
Latest monthly data showed deflation, with a -0.2% decline in prices
2-year Australian dollar yields are near 2%; if we add back in the latest negative data that makes real yield grow to 2.2%, which towers over the G-7 countries.
Interestingly, the 2-year Australia – United States yield spread is falling in front of tomorrow’s meeting. Are expectations for a cut rising in real time?
3) The currency is being bid up along with commodities prices, which makes sense; but it is heading into technical resistance at swing and retracement levels which come in at 0.7848 and 0.7877, respectively:
AUD/USD (0.7628) vs. Iron Ore Futures vs. Crude Oil Futures Daily:
4) Sentiment is increasingly bullish, as speculative open interest show Aussie bulls versus bears 69% vs. 31%, based on the latest Commitment of Traders Report dated 4/26/16:
Commercials are heavily short at 86% bearish based on open interest data.
Does any of this matter in what the market is increasingly perceiving as a Fed weak dollar policy that could have some legs? Maybe not; but oil is turning over a bit today. Stay tuned.
President, Black Swan Capital
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