Conclusion. With the pro-active decision to cut the cash rate target, RBA has clearly entered the global currency battlefield and has showed its willingness to combat too strong an AUD. This pro-activeness is supported by the Australian Prudential Regulation Authority (APRA) that has drawn a line in the sand with respect to Australian bank lending for property speculation. This has reduced the worries of an overheated housing market.
Interest rate markets are currently pricing an implicit 67% probability of another rate cut in March. We believe this pricing is justified and we now call for another 25bp rate cut aimed at further stimulating business activity and household consumption in the economy. We believe another rate cut will pull AUD/USD towards Stevens' 'unofficial' target of 0.75 in 1M. After RBAs rate cut in March we expect the cross to be dragged down further on the back of divergence in monetary policy and in particular through a re-pricing of the Fed. We now expect the cross to stabilise in 6-12M when a Fed hiking cycle has been priced and as the Australian economy recovers.
We target AUD/USD at 0.75 (previously 0.81) in 1M, 0.74 (0.80) in 3M, 0.73 (0.79) in 6M and 0.73 (0.78) in 12M.
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