Synopsis:

BofA expects the RBA to cut rates by 25bps to 4.1% at its February meeting, though risks remain for a hold. While AUD is near its projected Q1 trough (0.62), it is too early to fade tariff-related risk premiums, with US trade investigations and China policy meetings in focus over the next six weeks.

Key Points:

1. RBA Rate Cut (25bps to 4.1%) Expected:

   • Q4 trimmed mean inflation fell to 3.2% (20bps below RBA’s forecast).
   • Supports gradual easing, but a February hold remains a risk.

2. AUD Outlook:

   • AUD has been highly sensitive to tariff risks, briefly hitting post-COVID lows.
   • Too early to fade tariff risk premium until US trade investigations and China policy meetings conclude.
   • Gradual AUD recovery expected in Q2, led by USD depreciation and later China stimulus effects.
   • Higher-than-expected RBA terminal rate (3.6%) supports a medium-term AUD floor.

Conclusion:

BofA expects a 25bps RBA rate cut but acknowledges risks for a hold. While AUD is near its forecast trough, tariff-related risks remain, and it is too early to fade downside risks. A recovery is expected in Q2, driven by USD weakness and China stimulus.