FX Update: AUD Rallies, But USD Chomping At The Bit

 | May 05, 2015 05:15AM ET

The Reserve Bank of Australia lowered the cash rate target 25 basis points to 2.00% as expected, but guidance was apparently not as dovish as the market was pricing in. Governor Glenn Stevens’ rhetoric was relatively balanced. On the one hand he bemoaned the risks to private demand from weak business capital spending, saying: “The economy is therefore likely to be operating with a degree of spare capacity for some time yet.”

On the other hand, Stevens also noted improved consumption and employment numbers as a promising development. The market’s immediate takeaway seems to be that this is a “wait-and-see” statement and takes away the prospect for a further easing bias that was priced in more aggressively coming into this meeting. It will take a material worsening in Australian activity numbers or weak commodity prices/extremely weak risk appetite to push AUD lower from here.

So from here, the upside story for AUDNZD might well continue apace, particularly on weak New Zealand data and more dovish Reserve Bank of New Zealand risks, but AUDUSD upside may be quickly capped, particularly if we get a solid round of US data through the end of this week.

The short-term interest rate spreads suggest that AUDUSD is relatively fairly priced after tonight’s reaction. It should be noted that the statement continues to contain fairly sharp wording on the exchange rate: “Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.”

Chart: AUDUSD

After the RBA meeting, the AUDUSD launched a sharp rally on what the market sees as a relatively hawkish shift to flat forward guidance from a more clearly easing bias. Still, the bearish case looks intact here as long as we continue to trade south of 0.8000, and any coming closes below 0.7800 after US data later this week will encourage the view that we are on our way to testing the lows for the cycle again toward 0.7533.