AUD: Market pricing a sub 1.50% cash rate on a 12 month horizon – Deutsche Bank

Adam Boyton, Chief Economist at Deutsche Bank, suggests that following the lower-than-expected Q1 CPI and the May rate cut from the RBA the Australian market is now pricing a sub 1.50% cash rate on a circa 12 month horizon (a move of some 40bps since late April).

Key Quotes

“Our view is for a 1.25% cash rate on a 12 month horizon, i.e. a little more easing than is currently priced. AUD/USD has largely moved in line with interest rate differentials at the front end, although longer dated futures suggest scope for a little more downside in AUD/USD. We should note, of course, that a more hawkish Fed could see a materially lower AUD/USD. Turning to crosses AUD/EUR looks a shade too low given bond spreads. AUD/CAD, however, would appear to have scope for significantly more downside.”