Insights 
VT 
National Australia Bank predicts that the Reserve Bank of Australia will reduce interest rates in November, with another cut expected in February. This action will potentially lower the cash rate to 3.1% by early 2026.
The approach is expected to be gradual, allowing policymakers to maintain inflation within target ranges and prevent excessive economic stress. Factors influencing this prediction include moderating inflation, a weakening labour market, and subdued economic growth.
Potential Risks and Influences
There are risks present in both directions. Stronger wage growth or continued inflation in the services sector might slow down the Reserve Bank’s plans. Conversely, weaker global demand or further disruptions in trade could speed up the rate cuts.
The market is now positioning for a November rate cut, with a second move expected early next year. We see the cash rate target likely moving towards 3.1% by February 2026. This implies a gradual easing cycle from the central bank.
This view is solidifying because recent data supports it. The latest quarterly CPI print came in at 3.1%, showing inflation is moderating towards the RBA’s target band. At the same time, the unemployment rate edged up to 4.3% in August, confirming a softening in the labour market.
For traders, this means we should consider going long interest rate futures contracts for upcoming meetings. Three-year government bond futures are also attractive, as their prices will rise when yields fall with expected cuts. This is the primary way to position for the anticipated easing.
Strategies and Market Implications
We should also watch for a steepening of the yield curve. Short-term rates are likely to fall more than long-term rates as cuts become a reality. This suggests trades that profit from the widening gap between two-year and ten-year bond yields.
Looking back at the easing cycle that began in mid-2019, we saw front-end yields move well in advance of the actual RBA decisions. History suggests that the market will price these cuts in over the coming weeks, not on the day of the announcement. This makes acting now more critical than waiting for the RBA’s official statement.
However, risks from persistent services inflation remain a concern. To manage this, we can use options, such as buying cheap, out-of-the-money calls on interest rate futures. This provides protection if the RBA is forced to delay its cuts due to stubborn inflation pressures.
A dovish RBA pivot will also likely weigh on the Australian dollar. We anticipate the AUD/USD pair could test lower levels as interest rate differentials with the US narrow. Therefore, buying AUD/USD put options could be an effective way to speculate on or hedge against this currency weakness.
