RBA decided to cut the rate for another 0.25 % after previously they lowered for 0.50 % to bring their cash rate down to 3.50 %. Further rate cut remains possible to lower the equilibrium internal rate of return. However, the current 3.50 % cash rate remains the highest rates amongst the major currencies and followed by New Zealand for 2.50 %.
The rate cut will cause the AUD currency band to be aligned to downward direction (for positive interest rate differential) and to upward direction (for negative interest rate differential) as the result of the tightening on their interest rate differential. However, although the lower and upper bands to be aligned to both direction, their exchange rate target zone will be narrowed and result lower volatility for the coming trades.
Positive interest rate differential currency pairs (AUD/USD, AUD/CHF, AUD/JPY, AUD/CAD) will revisit their previous lows and may break them to re-establish a new lower currency band's margin. Accordingly, AUD/USD may revisit and break the level of 0.9650 down to 0.9500. AUD/CHF may revisit and break the previous low 0.9250 as well as AUD/JPY to visit and break the level of 73.00. Although AUD/CAD has the second strongest performance interior the AUD currency band and already feasible to long/buy, the pair will be under pressure until another pairs to reach their lowest equal average traded weighted rates at their new lower currency band's margin. AUD/NZD represents the strongest performance interior the AUD currency band. However, the pair will also under pressure until their equal lowest average traded weighted rates to be stabilized and measurable at their new lower currency band's margin.
And, should the lowest equal average traded weighted rates of the positive pairs equals to the highest equal average traded weighted rates of the negative pairs, then the long on the positive pairs and the short on the negative pairs become commendable. However, their turning points will be mixed.
Accordingly, the RBA rate cut will only to slower the capital inflow into AUD currencies and AUD-denominated interest bearing securities. Both carry traders and macro traders will resume their investment into those securities. At such, AUD currency band will continue to have the strongest performance amongst the major currencies.
