A reality check for AUD

We recently had a surprise election victory in Australia, with incumbent prime minister Scott Morrison staving off a challenge from Labor. The ballot was an eye-opener for pollsters given results favouring Labor as late as Friday, May 17; the previous week even saw some betting shops paying out for a Labor victory.

Monday saw a massive, 147 basis point spike in Australian equities to 6,476 (a new, multi-year new high) as well a 58 bps AUDUSD rally to 0.6908. Today, however, has brought some much-needed reality back to the Aussie, with the latest Reserve Bank of Australia minutes suggesting that the RBA is likely to cut rates at its upcoming June 4 meeting

The implied probability of a cut moved from around 70% to 89% over the past 24 hours.

This is something that was flagged numerous times in our own Macro Monday analyses, as well as by Saxo Australian Market Analyst Eleanor Creagh. The new trading range for the Aussie, which has held its ground over $0.70 for some time – is now likely to have a $0.69-$0.70 ceiling, with AUDUSD now standing at 68.84.

The key risks for a higher Aussie appear somewhat distant at the moment; we would need a pickup in Australian inflation, growth and an improvement in China-US trade talks. Australian equities, on the other hand, seem to be on a different planet. We broke to multi-year ASX 200 highs around the 6,400 level with very little resistance on the monthly chart to the all-time high of 6,851.50 seen in Novembe 2007. It's really quite stunning when you consider that this is a 28 year-plus bull cycle, with markets currently enduring falling inflation, large amounts of consumer debt and a property market that is a slow-motion train wreck.

One likely takeaway here – not just from an Australian business cycle perspective, but a global one – is a lower AUDUSD, as well as lower Aussie bond yields. This looks likely to be a key structural position for quite a few quarters,if not years, to come