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Predictably, AUD/USD and the AUD crosses traded in a tight range throughout Asia, with AUD/USD moving between 1.0414 and 1.0434 up until the RBA statement. Prior to the RBA cutting rates to 3%, we were keen to see the level of Australian government bond holdings for the September quarter given that foreign central bank buying has been a key source of AUD strength for much of 2012. It seems that foreign central banks now hold 72.2% of all outstanding debt in the September quarter, down from 76.6% in the three months prior, with foreign holdings of bonds with maturities of one-year or more falling by 3.6 percentage points to 74.4%. So it seems that non-residents have increased their long-term debt holdings on the prior year, but it is clear that the pace of buying is falling and this could take away much of the impetus to drive AUD/USD above the September high of 1.0625 anytime soon.
The reaction in the currency space was relatively predictable in some ways given you had a market that was clearly positioned for a cut, with retail traders having a large short bias while the swaps markets was pricing in a 93% probability of easing. From a pure risk reward perceptive it favoured being long, with the real downside risk being a significantly dovish statement. AUD/USD rallied to 1.0458 after the market had viewed the statement and realised that the RBA had kept the door open to more cuts, although it didn’t sound too concerned about current financial markets. There were no major changes in language and the statement gave no real indications that the bank was going to cut 68 basis points (bps) over the next twelve months. We would not be surprised if AUD/USD and some of the crosses creep higher in the short-term as some who had been positioned for a series of cuts in 2013 close out, however the initial trade looks like some are selling the rally. The bank did make reference to the recent CAPEX numbers, suggesting the ‘peak in resource investment is approaching’, although some would argue that the most important number for the RBA next year will be the Q4 CAPEX numbers on February 28, which will give the bank a clear, twelve-month view of business spending intentions through to June 2014. We feel the last paragraph of the statement is important, which suggests ‘the full effects of earlier measures are yet to be observed, the Board judged at today's meeting that a further easing in the stance of monetary policy was appropriate now’. That for us seems a strong take-out.
The RBA now has eight weeks to assess how the 175bps of easing have worked through the system and the current landscape ahead of its February meeting. Things could be very different by then given the ‘fiscal cliff’ and the potential this event has to disrupt sentiment in a market that is positioned for a positive outcome. However, in the short-term, we would suggest waiting for price to dictate play and would potentially advocate long positions on a daily close in AUD/USD above the November 7 high of 1.0480. On the other hand a close below 1.0390 would suggest a deeper pullback to 1.0288, the November low.
Chris Weston, Research Analyst,