Forecasting and Market Update - Trading the RBA Policy Error

Tue, 04 Apr 2017  |  

I’ve watched RBA policy actions for close to 30 years and for the first time, I am finding it very hard to read the RBA thinking and actions right now.

For some odd reason, it is ignoring a crush of evidence on soft growth, low inflation and rising unemployment, yet it has and magnified a rise in house prices in Sydney and Melbourne when considering what to do with official interest rates.

This makes it difficult to pick the timing of future interest rate moves and the implications this will have for bond and currency markets, but suffice to say, I am delighted with the trades in place from February which are comfortably in the money (see https://thekouk.com/item/464-trading-for-rba-policy-error.html  ) and in fact I have added a little to each position in recent times.

The key point is that the RBA will, in my estimation and assessment, cut interest rates at least once, probably twice and possibly more over the next 3 to 12 months. Yields will fall sharply from current levels if this happens and it is likely the AUD will be crunched lower as a result.

Which brings me to the call: the RBA will cut interest rates around July and November, when it’s clear inflation is contained, the unemployment rate is high and housing is cooling.

A 1.0 per cent cash rate would see Australian yields well below those of the US and in that case, the AUD will rapidly go to hell in a handbasket – 0.7000 and lower beckons.

These views have been well telegraphed to my clients.

For this blog, please note that the above material is NOT investment advise – seek professional guidance and trade at your own risk.

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