This week, we are focusing on the Southern Hemisphere and important meetings from the RBA (Reserve Bank of Australia) and RBNZ (Reserve Bank of New Zealand). The RBA is expected to lower its cash rate by 25 basis points to 3.60%, while the RBNZ is likely to keep its rate steady at 3.25%. Predictions from the market support these expectations. Most analysts anticipate a rate cut from the RBA, but Citi and Bank of America stand out as exceptions. Major banks in Australia are predicting a third cut this year, with market pricing indicating a 95% chance of a reduction and about 78 basis points of cuts by the end of the year.

RBA’s Cautious Approach

Citi recommends waiting for complete Q2 CPI data and updated forecasts before further cuts, advocating a careful strategy on rate adjustments. Market pricing reflects the associated risks of any unexpected developments. For the RBNZ, the situation is clearer, with an 81% probability of no change in rates. Back in May, they highlighted that market rates would influence their decisions; this upcoming meeting will be an important test. They have another meeting scheduled for August, allowing more time to assess additional data. Recent comments suggest the RBNZ is relaxed about core inflation. This puts them in a good position to pause any changes this week and consider rate cuts later in the year. The information suggests a period of cautious divergence in monetary policies between the two banks. Australia seems ready for more easing, with the market confidently predicting rate cuts from the RBA, while New Zealand seems inclined to keep rates as they are for now. These expectations are based on recent statements and economic signals.

Market Confidence and Pricing

The communication from the Reserve Bank of Australia and local data show that the market largely accepts the idea of easing policies. Major Australian banks are aligning their rate forecasts, reflecting high confidence in cuts throughout the year. Market pricing indicates almost a full percentage point in cuts expected by December. Investors appear satisfied with current inflation trends and are now focusing on supporting growth. Disagreements from Citi and Bank of America highlight a cautious perspective, calling for patience and the collection of more data, especially the full inflation release for the second quarter. While they represent a minority view, their perspective could quickly gain popularity if any inflation data surprises the market. Given the tight pricing of rate expectations, any unexpected inflation revision or hawkish comments can lead to swift movements in short-term interest rate futures. Traders should prepare for various scenarios, ensuring that their strategies remain effective without relying too heavily on one possible outcome from the July meeting. In New Zealand, the Reserve Bank faces less immediate pressure to act. With inflation declining and the housing market recovering, they have more flexibility to be patient. Current projections based on front-end OIS contracts suggest minimal surprises this week. However, the consistent messaging around pausing rates, noted in previous meeting minutes and recent policy statements, supports a wait-and-see approach, bolstered by upcoming labor and consumption data in the next two months. A key focus is on expectations, which are already low. Any changes in tone during the press conference—whether signaling a tendency towards cuts in Q3 or adopting a more cautious stance due to wage growth—could shift market curves in ways not currently anticipated. Attention should be on the Governor’s comments about the August meeting. For short-term trades, this offers opportunities to adjust based on revised estimates for the terminal rate and changes in inflation as July’s data is released. In the near term, rate traders should consider pricing variations and cross-market volatility, especially in the AU/NZ spread, which may remain sensitive as policy divergence develops. With both central banks providing clear guidance, the focus should be on timing rate adjustments rather than aggressively positioning for unexpected outcomes. Staying flexible is crucial, prioritizing short-term instruments and adjusting exposure based on incoming CPI and employment data from both sides of the Tasman. Create your live VT Markets account and start trading now.

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