UBS sees RBA cutting rates as Australian dollar falls below 0.65

The Australian dollar has depreciated below 0.65 against the USD, driven by a strengthening greenback and disappointing domestic employment figures, which show unemployment at its highest since November 2021. UBS maintains its forecast for the Reserve Bank of Australia to implement three 25-basis-point rate cuts by February, bringing the cash rate to 3.1%, citing a cooling labor market, with the upcoming Q2 CPI on July 30 crucial for policy confirmation. Despite near-term weakness, UBS views current AUD levels as a potential buying opportunity, recommending long positions at 0.64 or below, and suggests AUD/CHF and AUD/CNY as alternative entry points.

Analysis

The Australian dollar (AUD) has depreciated below the 0.65 level against the U.S. dollar, primarily driven by a strengthening greenback and weak domestic employment data, which pushed unemployment to its highest point since November 2021. This labor market cooling reinforces UBS's forecast for the Reserve Bank of Australia (RBA) to initiate a monetary easing cycle, with three 25-basis-point rate cuts anticipated between August and February, targeting a terminal cash rate of 3.1%. The next major catalyst is the Q2 CPI release on July 30; UBS projects that both headline and trimmed mean inflation will slightly surpass RBA forecasts, a critical data point that will inform the central bank's policy decisions. Despite the near-term bearish sentiment, UBS strategists frame the current weakness as a strategic buying opportunity, recommending investors establish long AUD/USD positions at or below the 0.64 level. For diversification, UBS also suggests considering long positions in AUD/CHF and AUD/CNY as alternative entry points.

Key Decisions for Investors

• Investors with a bullish outlook on the Australian dollar should consider the current weakness a potential entry point, specifically targeting long positions in AUD/USD at or below the 0.64 level as suggested by UBS.
• Closely monitor Australia's Q2 CPI data on July 30, as an inflation reading that confirms or contradicts the RBA's forecasts will be a key determinant for the timing of the anticipated rate cut cycle.
• To mitigate risks from direct USD strength while maintaining long AUD exposure, consider alternative currency pairs such as long AUD/CHF or AUD/CNY, which may offer more favorable entry points.
• Given the forecast for RBA rate cuts driven by a cooling labor market, any further deterioration in Australian employment figures could accelerate AUD weakness, presenting a tactical shorting opportunity before a potential reversal.