RBA on hold for extended period but BAML still bearish on AUD

Extended Hold For RBA; Staying Bearish AUD From Current Levels - BofA Merrill

The 3Q inflation data released yesterday highlights two themes for AUD markets.

A higher-than-expected headline print might take a November rate cut from the Reserve Bank of Australia (RBA) off the table. But a particularly weak pulse of underlying inflation and below-trend domestic activity means any currency strength resulting from a "rates on hold" view would not be welcome.

We expected the RBA to be on hold for an extended period following the August rate cut. It now looks likely this will be more extended than previously thought as two rate cuts in 2016 have served to support activity in the housing sector.

We still expect the RBA will maintain an easing bias as activity and inflation risks are still skewed to the downside. With the economy still undergoing its transition toward nonmining activity the RBA still has a preference toward a lower currency despite higher commodity prices. So the Bank is again confronted by a communication challenge.

We maintain a bearish bias for AUD FX from current levels. While the ongoing rally in commodity prices and very resilient price action in AUD is a near-term risk, our view is that property tightening restrictions in China will eventually lead to a slowdown in its commodity demand. This is likely to spill over to commodity prices and reverse the recent improvement in Australia"s terms of trade, albeit with some lags. Faster RMB depreciation will only amplify this spillover.

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RBA on hold for extended period but BAML still bearish on AUD
RBA on hold for extended period but BAML still bearish on AUD
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