It was a close call. After Australia's leading banks lifted the variable rate mortgage rates recently, many observers expected the Reserve Bank of Australia to offset the tightening with a rate cut in early November. Others emphasized that the variable rate increases were linked to regulatory changes not to financial conditions that the RBA could influence.
Today's inflation report swung sentiment toward a rate cut next week. It appears that the derivatives market is pricing in about an 80% chance of a 25 bp rate cut.
Australia reported Q3 CPI rose 0.5% for a 1.5% year-over-year increase. The market had expected a 0.7% quarterly increase and a 1.7% annualized pace. From policy making perspective, it is also important that the trimmed mean measure was also soft. The 0.3% increase compares with a 0.5% consensus guesstimate. The year-over-year pace stands at 2.1% not the 2.4% the market expected.
Over the last couple of sessions, the US dollar has been consolidating the gains scored at the end of last week. The greenback was firm, and the Australian news saw the Aussie drop 1%, to near $0.7100. The price action suggests that long cross rate positions that had been built, such as long Australian dollar short euros, had to be unwound as stops were triggered.
Some see the risk of an RBA move as increasing chances that the Reserve Bank of New Zealand cuts rates later today. The New Zealand dollar is also trading heavily. The RBNZ has cut rates at three consecutive meetings. Until the last one, the dairy auction had improved (15%+ at each of the previous four auctions). The New Zealand dollar has strengthened on a trade-weighted basis. Treasury's English seems somewhat less concerned than the RBNZ's Wheeler. Even if the RBNZ does not cut rates, it will likely talk dovishly.