Synopsis:

Bank of America (BofA) expects the Reserve Bank of Australia (RBA) to keep policy rates unchanged at its upcoming meeting and recommends long positions in AUD/NZD below 1.10.

Key Points:

1. RBA Meeting Expectations:

   • No Rate Change: BofA anticipates the RBA will maintain its current policy rate of 4.35% during the August 6 meeting.
   • Inflation Data: The decision follows recent 2Q inflation data showing moderated underlying inflation momentum.
     • Trimmed-Mean CPI: Increased by 0.8% quarter-on-quarter, below the market expectation of 1.0%.
     • Year-on-Year CPI: Reached 3.9%, slightly above the RBA's forecast of 3.8%.

2. Policy Implications:

   • Acknowledgment of Progress: The RBA is expected to recognize that the current policy rates are effectively reducing price pressures.
   • Slow Progress: The gradual return to target inflation suggests that the RBA will likely hold rates steady for an extended period.
   • Consumer Sector Weakness: The RBA Board is expected to highlight ongoing weakness in the consumer sector, with inflation-adjusted retail sales contracting by 0.3% quarter-on-quarter in 2Q, marking the second consecutive quarter of decline.

3. Trading Recommendation:

   • Long AUD/NZD: BofA recommends long positions in AUD/NZD below 1.10, based on the expectation that the RBNZ will cut rates in August while the RBA remains on hold until 2025.
   • Market Pricing: Neither the potential RBNZ rate cut nor the RBA's extended hold is fully priced into the market, presenting an opportunity for long AUD/NZD positions.

Conclusion:

BofA forecasts that the RBA will maintain its policy rate at 4.35% during the upcoming meeting, acknowledging progress in reducing inflation but recognizing the slow pace of achieving the target. They also recommend long positions in AUD/NZD below 1.10, expecting rate cuts from the RBNZ and an extended hold from the RBA, which are not yet fully priced into the market.