FX: Ahead Of RBA October

As it stands, markets are heavily leaning in favour of a 25bps rate cut during tomorrow's Oct-1 RBA meeting, due for release at 2.30pm AEST. The implied probability of a 25bps rate cut at time of writing is 76% having seen expectations aggressively brought forward following a sluggish August labour market print. The general consensus among market participants, prior to the release of August data, was for the RBA to undertake a 25bps cut in November. 


RBA cash rate at record lows having underwent 47 cuts to 27 hikes since 1990. Source: RBA
 

While many seem convinced that the "writing's on the wall" for an October cut; a deeper look at Aussie data over the past month, in addition to, last Thursday's more-balanced-than-expected Gov. Lowe speech, could suggest otherwise. That is, if Lowe's speech is anything to go by, there could be potentially a higher chance than what markets are currently pricing in for a surprise October hold. Though it shouldn't take away from the RBA's accommodative stance on an extended period of low interest rates, it'd be remiss not to notice the tone and language in which Lowe alludes to strong Aussie fundamentals, reasonable and stable global growth, and historically low unemployment numbers within developed nations in his speech. Strikingly, Lowe highlights that "there are some signs that, after a soft patch, the economy has reached a gentle turning point". 
 

If the RBA only considers August's labour market data, which saw headline employment beat but also overshadowed by weaker unemployment at 5.3% and losses in full-time jobs, then there's certainly a fait-accompli argument for an RBA cut tomorrow. The RBA having referred back to, time immemorial, necessary tightness in the labour market as a major lever in boosting domestic inflation, would clearly have the rationale to ease monetary policy further.

However, the RBA takes into account a more dynamic view, determining whether the trajectory of data will fall away from its forecasts. Given data to date has been mixed not yet clear as to whether it shows a precipitous deterioration, and the fact that stimulus in the form of two rate cuts were only handed out in June and July, the RBA could very well wait one more month in order to observe the "expected pickup in growth". As Lowe suggested, the RBA will again "take stock of the evidence" as the "strength and durability of this [recent] pick up remains to be seen". 
 

However, on the balance-of-risks, markets are highly likely to still realise their expectation of a 25bps rate cut given the combination of 1) increased geopolitical risks in US-China trade tensions; 2) spare capacity in the Aussie labour market; 3) a global downward shift in major central bank rates which Lowe said the RBA cannot fully "insulate" themselves from; 4) the lateness of likely fiscal stimulus in 2020; and 5)  weak household spending, the "main source of uncertainty" for the RBA as described by Lowe. The RBA are more than prepared ease rates in order to support growth, inflation and full employment. 
 

Forward volatility, as priced in the options market, has AUDUSD elevated above G10 majors with daily range implied at +/-0.5% or 30-40 pips. It'd be prudent, therefore, to look out for wider entries/stop losses outside recent consolidation areas from 0.6745-80. Minor levels to watch to the downside at 0.6730-45 should the RBA come out with a rate cut in line with expectation. If the RBA turn more dovish then expected, suggesting further rate cuts before the close of the year, AUDUSD could push towards 0.6692 (Aug 26 low) and beyond that - 0.6677 (year lows). Conversely, the psychological handle of 0.68-0.6810 serves as an area of resistance for a more hawkish reaction.


AUDUSD on a daily timeframe. Source: Trade Interceptor