We expect the RBA to deliver a 25bp rate cut, reflecting both further welcome progress in returning core inflation back towards target and the continuing highly uncertain global backdrop. We now believe that RBA might cut by 25 bps each in it’s 20th May & 12th Aug meeting and then go on a long pause. For us the terminal rate is 3.6% through CY26 unlike current market pricing of 3.25%. In our experience, the RBA typically provides less forward guidance than many central banks, and likely regards this approach as particularly prudent given the highly uncertain global backdrop. What will be interesting to watch out will be any changes on the current passive QT program. In it's April meeting minutes, a process of gradually selling bonds, or “active QT” was flagged as an alternate possibility. Any shift from passive to active QT would likely have some negative impact on the bond market. We ourselves believe there is a strong case for the RBA to use active bond sales to unwind its bond holdings more quickly than will happen under its existing ‘hold to maturity’ model. It remains to be seen what the Governance Board review comes up with. In general, we see benefits to an active bond sale programme. We remain bullish on AUD because the market is currently pricing in a lower terminal rate than our expectations. Also, AUD looks to be the perfect proxy for both risk on and risk off situations. For risk on, it is a natural selection as it is a commodity exporting country. For risk off it is not linked to US via the tariff channel and hence minimum impact because of tariff news flows. The 200 DMA at .6455 is weighing on it’s upside move but we believe post the RBA move it should comfortably rise above it. .6455 is also the 50% retracement of the entire move between .6942 & .5967. Hence, we recommend buying AUD at current levels of .6405 with a stop loss at .6350.
