The RBA appears set to commence a gentle easing cycle on 18 February, with a 25bp rate cut, lowering the cash rate to 4.10%. However, we expect its guidance to appear cautious and at best neutral. We believe that we might see a total of 100 bps of cuts by end CY25 against the current 77 bps of cuts only being priced in currently. With latest CPI reading coming below estimates, RBA would gain sufficient confidence that inflation was moving back to its target band, and would, therefore, be willing to make monetary policy a little less restrictive. Global downside risks from higher US tariffs and tariff-related uncertainty adds to the case for a lower cash rate, at the margin. Given that RBA places more weight on quarterly CPI outcomes than the monthly CPI indicator, we think dovish guidance and a back-to-back rate cut in April is unlikely. March quarter CPI data will not become available until 30 April, making 20th May the next truly live meeting where we expect RBA to again cut by 25 bps. The remaining 50 bps cuts we see coming backended in H2CY25. We see terminal rate at 3.35% from current level of 4.35%. In the short term, we think risk-reward favours positioning for AUD upside against the USD as a play on Australia’s less vulnerable position on trade with the US, given that Australia runs a trade deficit with the US. We also believe China is likely to see more stimulus in the March NPC meeting hence AUD is a buy on dip for most of Q1CY25.
