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The Federal Reserve shocked the markets with a 0.50% cut on Tuesday and the RBA has followed with a 0.25% cut. How will this affect the Australian dollar?

Here is their view, courtesy of eFXdata:

Credit Agricole CIB Research discusses AUD outlook and  prefers to stay neutral in the near-term.  

“The RBA responded to a likely contraction in GDP in Q1 by cutting rates by 25bp yesterday. The Fed, however, cut rates by 50bp and it seems that central banks appear to have restarted their race to the bottom in rates.  The RBA has admitted that it has only one more 25bp rate cut before it has to rely on unconventional monetary policy to ease policy further, which is a route they are very reluctant to take. Meanwhile, the Fed has significant room to ease further. Indeed, the Australian-US 2Y swap rate spread has jumped to its highest level since February 2018,” CACIB notes.

While this could be signalling the final turnaround in AUD/USD we are cautious for two reasons.  First, the coronavirus may yet force the RBA to cut further and then the market would quickly price in a much greater chance of QE in Australia. Second, if coronavirus concerns were to ease, the Fed may be quicker to reverse course than the RBA,” CACIB adds.

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