Synopsis:

BofA expects the RBA to cut rates by 25bps this week, in line with market pricing, while maintaining a cautious, gradual approach to easing. Quant investors are pushing AUD/NZD higher, and the trend is expected to continue unless a major catalyst emerges.

Key Points:

1. RBA Expected to Cut by 25bps, but Risks of a Hold Exist:

   • Inflation data has been weaker than expected (trimmed mean inflation fell to 3.2%, 20bps below RBA’s forecast).
   • The RBA is likely to frame the rate cut as gradual easing rather than the start of an aggressive cycle.
   • A surprise hold is still a risk, but a cautious 25bps cut is the base case.

2. Quant Investors Driving AUD/NZD Higher:

   • The current AUD/NZD rally began after the dovish RBNZ shift and weak NZ GDP data in Q1 2024.
   • Quant models suggest a continuation of the uptrend, with a target of 1.1295.
   • No strong catalyst exists yet to trigger a reversal in the trade.

3. AUD/USD Volatility as a Hedge:

   • With tariff risks and US economic resilience, AUD/USD remains vulnerable to downside moves.
   • BofA suggests using AUD/USD volatility as a hedge against potential shocks.

Conclusion:

BofA expects a cautious 25bps cut from the RBA, while quant investors continue to chase AUD/NZD higher toward 1.1295. The RBA’s tone will be key in determining whether AUD momentum can extend further, while AUD/USD remains a riskier bet due to broader macro headwinds.