Synopsis:

BofA anticipates that the Reserve Bank of Australia (RBA) will keep interest rates steady during its September meeting due to persistent inflation pressures and a tight labor market. They maintain a long position on AUD/NZD, targeting 1.13.

Key Points:

1. RBA Policy Outlook:

   • The RBA is expected to remain on hold, as August employment data indicates a slower normalization in the labor market.
   • Inflation pressures are still significant, allowing the RBA to adopt a patient stance.

2. Impact of Federal Reserve's Easing Cycle:

   • Despite the Fed’s recent 50bps rate cut, BofA believes the RBA can afford to wait longer before making any changes, as it did not raise rates as aggressively as other developed market central banks.

3. Trade Strategy:

   • BofA plans to express this view by positioning for December 2024 RBA rates and maintaining a long AUD/NZD position.
   • They acknowledge the risk of soft CPI data, though expectations are already set for a drop in year-on-year inflation.

4. Market Conditions:

   • AUD/USD has risen above 0.68, but BofA advises caution in chasing this move due to concerns about China's import indicators from Australia.

Conclusion:

BofA expects the RBA to hold its current policy amid ongoing inflation and labor market concerns while maintaining a bullish stance on AUD/NZD. The firm highlights the importance of upcoming economic indicators in shaping future positions.