Slightly less dovish RBA

Market Brief

Slightly less dovish RBA

Risk appetite stabilized in Asia, following a solid performance from European and US markets. Sentiment improved as reports that Russia and Ukraine foreign ministers had made some positive steps in talks in Berlin. In addition, Iraqi and Kurdish forces regained the Mosul Dam from IS and Israel and the Palestinians agreed to lengthen their cease-fire truce by one-day. The Nikkei rose 0.83%, Hang Seng & Shanghai fell -0.09% and -0.31% respectively. Yet the rest of Asians regional equity indices were positive (Taiwan’s Taiex index rose 1.12% after a big fall yesterday). The positive sentiment carried over into FX, were stronger fundamentals (NAHB housing market index rose) helped USD gain in the G10 and verse low-yielding currencies. EURUSD dipped a marginal 10pip to 1.3350 and USDJPY bounced around the 102.60 handle. Outside of geopolitical developments, the only market driving economic news was out of Australia. The RBA minutes were less dovish then the markets had anticipated which allowed AUDUSD to grind higher. However, the AUDUSD move to 0.9343 session high was primarily short-covering and quickly reversed. AUDNZD was unable to challenge the 1.1095 barrier, and rejected bulls quickly exited short-term spec longs. EM Asia currencies are mixed against the USD, the greenback is no longer just a risk-off or funding currency but benefiting from its own forward outlook.

Period of rate stability

The RBA minutes were release in Asia and proved slightly less dovish then the market was position for. Members agreed that the sensible course would be for a period of stability for policy rates while noting that “significant degree of uncertainty” existing around the growth and inflation forecasts. Members noted that the AUD remained high by historical standards, offering little support for the weak economy. In regards to prices, inflation trend was higher than expected in the past quarter yet domestic inflationary pressures were still consistent with target. At this point there seems little probably that additional rate cuts are coming.

Key Events

The key scheduled events today, will be UK CPI inflation, US CPI and Housing starts. UK CPI inflation to slip marginally from 0.2% m/m and 1.9% y/y in June to -0.2% m/m and 1.8% y/y in July. In the US, softer gasoline prices in the key driving season should limit headline CPI change at 0.1%, while core is anticipated at 0.2%. US Housing start should rebound to 965K in July housing starts from June’s 893K.