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Sean Callow, analyst at Westpac, suggests that the fragility of the AUD/NZD rally to near 5 month highs after the RBNZ move is a clear sign that the Aussie remains vulnerable despite the RBA’s cautious statement.

Key Quotes

“The RBA’s steady hand at 1.5% surprised enough in the market to lift the overnight indexed swap curve well into 2020, with the terminal rate back above 1.00%. But markets still price a lot closer to 2 than 1 rate cut, with the RBA statement including lower growth and inflation forecasts.”

“Most importantly, the RBA introduced a policy outlook “that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target.” So it is not enough for the unemployment rate to keep hovering around 5%; it needs to trend lower, otherwise the RBA will cut rates. The monthly jobs report was already in close focus but now the April data next week will be a very nervous time for A$ traders.”

“Westpac retains its call for rate cuts in Aug and Nov, with the RBA statement reiterating its view that the job market is strong, not a view it is likely to change on one month’s data. The RBNZ meanwhile said it cut the OCR because “the outlook for employment growth is more subdued and capacity pressure is expected to ease”.”

“Yet the RBNZ now has “a more balanced outlook for interest rates”, with markets pricing only a 40% chance of another cut by 26 Sep. So RBA and RBNZ are now both at 1.5% but pricing is for terminal rates roughly 1.0% vs 1.25%, leaving the Aussie under pressure – even before US-China trade talks soured.”