RBA bearish on Chinese prospects, worried about high AUD

Recent Australian economic data has been running pretty close to trend so the reasons behind the 25 bps rate cut are that the RBA is very worried about international economic prospects and it doesn’t want to be left standing still whilst the Fed/ECB etc are racing to the bottom. They will use monetary policy to limit the AUD rise (and as they showed recently they are also willing to sell into rallies).

The RBA has a deeper insight than most into both Chinese economic prospects and central bank policies so what does this tell us about the immediate future? Based on this decision, risk trades might be set to struggle for the rest of the year.

  1. Interesting analysis.

    I have the feeling that any new cycle of instability in Europe will give the AUD another boost since it seems to be one of the main safe heavens out there. What I find most interesting is that the RBA thinks that the peak in the resource sector investment (capital spending) is for next year. This would mean their expectations is that China will still continue providing enough demand so that the investment in mining isn’t slowed this year. So I agree with you that risk trades will be overall weak this year, but I would think that RBA move is more reactive to the QE-infinity, OMT, BOJ programs, etc.

    So my analysis goes like this (also referring to your previous post about EURAUD): while the EURCHF is above 1.2, we should favor a bullish stance on EURAUD. If at any moment, there is a new crisis (and it seems soooo likely) in the eurozone and the EURCHF hits the wall again at 1.2, we should prefer shorting EURAUD. The drop in the EUR index should give us targets.

  2. Thanks Iridium, well thought through. You are right that if or when next EZ crisis hits then the AUD will become one of few safe havens regardless of what RBA does. But in meantime with MIT short EUR, I think long is better play

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