More Monetary Easing to Come in Week Ahead

Notes from Barclays Research:
With the recent surprising monetary easing and change in policy stance by numerous central banks (except for Brazil where the rate was hiked recently by 50bp), markets will focus on who would be the next to join the easing camp. Indeed, we now expect the RBA (Tuesday) to announce a 25bp cut and deliver another 25bp cut at its May meeting, cumulatively lowering its policy rate to 2.00%. While a 50bp cut by May is largely priced in by the market already, it will support our view of further AUD depreciation against USD.

Inflation data will be important in assessing monetary policy outlook. Turkey’s January CPI (Tuesday) will be closely watched, given Central Bank of Turkey (CBT) Governor Basci’s guidance of a potential emergency MPC meeting to cut rates if inflation shows a significant improvement, defined as a more than 100bp decline in headline inflation. Given our forecast for January CPI (Tuesday) to decelerate to +6.8% y/y (consensus: +6.8%) from +8.2% in December, we expect an emergency MPC meeting to be held on Wednesday, where a 75bp cut in the 1-week policy rate is possible. We also expect the CBT to lower the O/N borrowing rate (lower end) and O/N lending rate (upper end) by 75bp. That being said, we note risk to our call – that CBT’s recent communication last Friday that came on the back of extended TRY weakness may force the bank to skip the emergency MPC meeting. Such a move will likely be TRY positive.

Idea for the week ahead:

Short AUDUSD: We expect the RBA to cut 25bp next week. The market is divided with six economists including ourselves calling for a cut while 21 others looking for unchanged outcome, according to Bloomberg. And OIS is currently pricing in c.15bp cut at this meeting and 50bp cut by May. A cut by the RBA this week, earlier than the market expects, is likely to weigh further on the AUD. This is consistent with our technical strategy team’s AUD bearish view.

A break below support in the 0.7700 area would increase our bearish conviction for AUDUSD. Falling commodity prices, in particular copper, have helped weaken AUD over the past six years and our expectation of further downside for the base metals complex helps add to our bearish AUDUSD view. Australian 10-year yields are already trading at record lows and a rate cut announcement from the RBA on Tuesday would likely catalyse further currency weakness. Our next downside targets are towards 0.7100.

Published: 2015-02-01 15:21:00 UTC+00

More Monetary Easing to Come in Week Ahead