A client note titled “Australian Macro Views” from Greg Gibbs at RBS Singapore discusses his view on Australian rates and dollar. Note that its “not intended for retail client distribution”, which is a shame as Gibbs really knows his stuff. So, with that caveat (retail traders, look away now) …

In summary:

  • We have a constructive view on the Australian economy.
  • It appears to be weathering the downturn in the resources sector that has picked up pace in the last year.
  • There is potential for growth to transition to other sectors, with very strong residential investment set to underpin growth in the next year and broader infrastructure spending in the major cities beyond that.
  • Australia is benefiting from very easy global credit conditions including foreign investment inits property market.
  • Non-resource sector business investment may begin to grow from low levels with pent-up demand after several years of low growth and cost-cutting.
  • The AUD may need to fall to ensure growth remains on trend, but not as far as it may seem, and a stronger USD and higher US rates may put upward pressure on Australian rates from current relatively low levels.
  • We see upside risk to rates from the RBA policy statement and data this week, and potential for the AUD to outperform against the EUR and JPY.

On the RBA:

  • Since May, arguably, the RBA has had a soft easing bias, but with a strong preference to keep rates on hold for a long period.
  • Since its first policy decision this year in February, the RBA has concluded its monthly policy press release with,“On present indications, the most prudent course is likely to be a period of stability in interest rates.” There is no reason to expect this steady policy guidance to change this month, in my view. However, since May, the RBA’s forecasts and commentary imply risks still lie towards lower inflation and higher unemployment and thus further policy easing.
  • The RBA has coupled its sub-trend growth and subdued inflation outlook with more strident jawboning of the AUD.
  • The RBA’s view on the domestic economy may have been coloured to some extent by its desire to talk the currency lower. It has leaned somewhat towards a more conservative view of growth, particularly in its non-resources investment outlook

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  • Perhaps the market is listening too much to the RBA’s conservative view of growth and has pushed rates too low, failing to see the upside risks to growth and the possibility that an RBA tightening cycle is not so far away. There are signs that the domestic economy is coping well with the downturn in resources investment that has picked up pace in the last year.
  • The most likely outcome remains a long period of rates being on hold, but cuts appear most unlikely and we see potential for the RBA to begin lifting rates sooner than is currently priced in by the market. There is little room for the RBA to further play down evidence of resilience or further talk down the AUD. As such we see some upside potential for rates resulting from the RBA statements this week.
  • Our view is that US rates are likely to rise further as the improving momentum in the US economy forces the market and the Fed to prepare for hikes sooner and faster than is currently priced in by the market. This should prevent the AUD from rallying. However, conditions may be conducive to the AUD outperforming on crosses against the JPY and EUR in the coming weeks.

(Bolding is mine)