ASIA MORNING: Lowe On Time As RBA October Nears

Despite overnight gains in AUDUSD, which along with most of the G10 complex benefitted as markets starting positioning for The Fed's anticipated hawkish cut, the question of what the RBA will do come Oct-1 remains front of mind for our local AUD traders.  
 

Yesterday, we had a key data point in the Aussie Q2 Home Price Index which came out better than expected, -0.7% vs -1.0%e, driven by better Sydney and Melbourne results. While we also saw a marginally dovish read of the RBA's detailed minutes for the bygone September meet. In my mind, both seemed barely confirmatory for onlookers though AUDUSD traders took it more dovishly, trading the pair down 30pips. 

In terms of the decision on Oct-1, there's two strong arguments for both an RBA hold and 25bps rate cut. Both have been ongoing arguments in the Aussie market for some time. 

On one hand, the RBA have made repeated mentions towards subdued inflation pressures, a stagnant domestic labour market and heightened external risks, noting that "members would assess developments in both international and domestic economies" under their considerations for monetary policy. This would suggest that a 25bps rate cut would be needed to "make a sustained progress towards full employment and achieve more assured progress of the inflation target". 

On the other hand, the RBA also recognise the potential bottoming of housing markets in major capital cities, namely Melbourne and Sydney, citing there are "signs of stabilisation in the established housing market". Should prices in these housing markets begin to pick up rapidly, the inflationary effect of a 25bps rate cut would be reconsidered as the RBA seek to avoid a precipitous housing bubble.

Overall, I think it's still fair game for the RBA over the next fortnight with writing on the wall to be determined by a couple of key events on the horizon.

Either way, The RBA remain borderline. Markets are currently pricing in a 57% probability of no change (down from 73% on Monday) and 43% probability of a 25bps rate cut.
 

I'd expect AUDUSD to stay between 100D-EMA (0.69) and 50D-EMA (0.6845) across today's session on a slow news day. 
 

Closing at 6,695, the ASX 200 index has arguments for and against whether it breaches 6,700 today. I've come up with a non-exhaustive list below. 

For:

When Brent Crude rallied as high as 71.95 (+18%) on Monday after news broke over the weekend of a targeted drone attack on key Saudi oil and gas assets, markets were clearly rattled and uncertain as to when Saudi Arabian oil output would return to normal. With supply down and a complete return of output at least a few months away by all reports, Brent Crude was able to maintain it's price inflation.

Last night, however, events took to a turn for the better when Saudi Arabia's Energy Minister, Prince Abdulaziz Bin Salman, came out in a press conference and said that most of the oil supply could return as soon as month end. This led a reaction in Brent Crude Futures which saw markets trade it back down to the 64 handle, off -7%. 

Some nuance in his comments should be noted. The Abqaiq oil facilities are currently tracking at 2mn bpd with 5mn bpd likely to come back by September end. Being able to utilise the full processing capacity of Abqaiq is still likely to be closer to November. The supply deficit, in the meantime, will be plugged by Saudi's global crude reserves in order to maintain export levels.

The spillover effects from the attack in heightened geopolitical tensions and the risk of confrontation remain at large, though markets aren't really considering any escalation at this point. I think the rhetoric in a formal Washington assessment, set to be released over the next 48 hours, will give markets a better indication as to how the consequences of the attack get dished out, if any.