The Reserve Bank of Australia’s decision to keep its cash rate at the historically low level of 0.75% at today’s monetary policy
meeting was no surprise. Yet the release of unchanged 3Q inflation data last week finally appears to convince the RBA to adopt a wait-and-see
approach despite increased spare capacity in the labor market. By slowly abandoning its dovish bias and setting aside the possibility of
another rate cut by year-end, the RBA is expected to support a stronger AUD, although inflation remains well below its target range for
almost three years, while private consumption is worrisome.

3Q year-on-year headline and trimmed inflation are given at 1.70% (prior: 1.60%) and 1.60% (prior: 1.60%) respectively, still far
from the RBA’s 2% – 3% target band while 3Q retail sales turns negative for the third time in the past four quarters, questioning the
government’s ability to prop up spending in spite of the $110 billion tax cut validated in July 2019. In this context, it seems clear that the
GDP growth forecast for 2020, currently set at 2.75%, is likely to be revised downwards since the forecast for 2019 should be revised to 2.25%
(prior: 2.75%). Considering the latter, we would favor a scenario where the RBA is set to resume with Cash rate easing towards 0.50% at its
policy meeting on 29 January 2020 and a no-event on 11 December 2019. Implied probabilities are now underweighting the case of a fourth rate
decrease by ear-end, currently estimated below 20%. As US – China trade negotiations tend to confirm a partial agreement by November,
demand for the Aussie should stay vivid this month.

By Vincent Mivelaz



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