RBA Rate Cut Squeezes AUD

Asian bourses have ended trading, hitting four-month lows as weaker US data added to rising worries over Europe. Commodities and their currency sensitive pairings are not immune to the surround sound of contagion fears. Gold has been able to dig itself out of Monday’s bear market trap, ending on a high, and in the black. The same cannot be said for the Aussie, usually a strong yellow metal supporter, which is seen as higher risk because of the country’s commodity price exposure and high exchange rate. The RBA’s dovish stance is reducing the AUD’s yield spread advantage, adding to the fears of a hard landing in China. The continued aversion to risk is pushing down high-yield currencies. Euro political concern and weaker US data are having an exaggerated effect on the currency. The Aussie rate market continues to rally, pushing 2-year government yields down as the OIS market moves to price in a high probability that the RBA will deliver a -50bp cut on June 5.

Below are some other highlights of the week:


  • CNY: The PBoC lowered their Required Reserve Ratio by -50bps to +20% last weekend. This will allow authorities to release approximately +CNY500b of liquidity into the banking system and “help smooth liquidity imbalances.” Analysts are not ruling out any further cuts this year as China shift to supporting growth rather than boosting it. Guilty by association has the antipodean currencies currently struggling outright as weaker than expected Chinese data of late has added to this market unease.
  • NZD: Kiwi retail sales fell -1.5%, q/q, in Q1. This follows two quarters of Rugby World Cup-boosted sales (thankfully the All-Blacks won) at the end of 2011. However, antipodean currencies remain vulnerable to Chinese data reporting.
  • AUD: Aussie home loans rose +0.3%, m/m, in March, following a -2.5% decline in the previous month. The RBA’s role is to promote balanced growth; however, they acknowledge that growth in some sectors of the economy will remain below the average experienced over the last couple of decades. Market continues to price in a dovish CBank.
  • INR: India’s WPI inflation rose to +7.2%, y/y last month from +6.9% in March. It is worth noting that core prices fell -0.1%, m/m, on a seasonally adjusted basis with most of the rise in the headline driven by food. The higher inflation print increases the risk that the RBI may keep rates on hold at the next meeting in June.
  • AUD: The RBA minutes noted that it was “desirable for interest rates to move below the levels that prevailed in December, and a 50bp cut was required, taking into account higher bank funding costs and less mortgage pass-through.” This still allows them room to ease even further. If the global economy deteriorates next quarter, a similar cut will be on the table.
  • NZD: Non-resident bond holdings rose to +62.1% last month from +60.9% in March.
  • CNY: China’s Foreign Direct Investment has fallen for the sixth straight month, recording a -0.7%, y/y, decline in April after a -6.1% drop in the previous month.
  • KRW: South Korea’s import price index rose last month at its slowest pace in more than two-years, gaining +1.7%, y/y, compared with a +3.5% rise in March. The export price index was up +2%, y/y, after being unchanged in March.
  • NZD: Analyst’s note that Kiwi whole milk powder prices dropped -8.9% in the latest Fonterra auctions. Fonterra is the world’s biggest milk exporter. Year-to-date, prices have fallen -30%. A weaker commodity price always leaves the Kiwi vulnerable.
  • AUD: Aussie Westpac Consumer Confidence Index recorded a modest gain of +0.8% to 95.3 in May, compared with a -1.6% decline last month.
  • JPY: Japan’s machinery orders fell -2.8%, m/m, in March, following a revised +2.8% increase in February.
  • JPY: The Japanese economy expanded faster than estimated in Q1, boosted by reconstruction spending. Q1 GDP rose +4.1%, q/q annualized, while Q4 GDP growth was revised higher to +0.1% from -0.7% previously.
  • JPY: Housing loans grew +2.4%, y/y, in Q1, accelerating from the +2.2% rise recorded in Q4.
  • KRW: Korea’s department store sales fell the most in 3-months in April, declining -3.4%, y/y, compared with a +1.6% rise in the previous month. South Korea announced that it is “prepared to take prompt action to stabilize markets should it be needed as Europe’s sovereign debt crisis deepens.”
  • AUD: Aussie average weekly earnings rose +1.1%, q/q, in February.
  • NZD: Kiwi ANZ job advertisements fell -2% in April, following a revised -0.9% decline in March.
  • AUD: Aussie rate markets continue to rally, pushing 2-year government yields down -22bp as the OIS market move to price in a high probability that the RBA delivers a -50bp cut on June 5.
  • JPY: The Japanese government has raised its assessment of the economy for the first time in nine-months. This certainly will not help the fallout of yen appreciation. Finance minister Azumi said that he is watching the value closely and is cautious on yen strength.
  • CNY: China reported that average property prices in 70 cities covered in a government survey declined on a year-on-year basis in April. This was the second consecutive monthly decline, as developers continued to cut prices to boost sales amid a two-year-old government campaign to cool the property sector.






  • Inflation letters and Expectations are released in NZD and GBP
  • CBank statements, announcements and minutes come from JPY and GBP
  • USD, CAD and GBP provide Home and Retail Sales numbers
  • GBP has quarterly growth
  • HSBC Flash manufacturing is delivered by CNY
  • German ifo Business Climate will pique EUR interest
  • USD will finish the week with Durable goods and Claims


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments.
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