RBA predictably cut rates, supporting stocks and pressuring Aussie

The Reserve Bank of Australia cut its key rate by 25 basis points to 3.60%, sticking to its pace of one cut per quarter or every other meeting.

The RBA noted that inflation is moving in line with expectations, falling to 2.7% y/y on a trimmed mean basis and 2.1% on a headline basis. The central bank forecasts that inflation will remain close to the centre of the 2-3% target range and that the key rate will continue to decline.

The central bank points to business concerns, rising unemployment and slowing wage growth, but at the same time, we see a gradual recovery in domestic demand. This situation is a manifestation of trade wars putting pressure on exports, which are closely linked to the health of Asian economies.

Reports of trade delays and a willingness to ease policy helped the Australian stock index move further into historic highs.

The Australian dollar lost a modest 0.2% to 0.65. Since the second half of April, AUDUSD has been trading in a narrow range of 0.6350–0.6600, and since the end of July, it has been squeezed between the 200-day moving average from below and the 50-day moving average from above, reflecting a precise balance of forces. Excluding the April slump, the pair has been trending upwards since the beginning of the year, returning to the average values of the last two years. 

This dynamic makes the pair unattractive to long-term carry traders due to the low yield spread, which is unsuitable for medium-term speculators due to the lack of a clear trend, but it makes AUDUSD attractive for range trading.