RBA on hold, RBI cut rates

Market Brief

Data from the US were mixed yesterday as US manufacturing came in moderately higher than market’s expectations - ISM and Markit PMI Manufacturing at 52.8 and 54 respectively (versus 52 and 53.8 expected) and helped US stock market to stay in positive territory. However, the recent soft patch affected American people and made them manage their spending more cautiously as April personal income rose 0.4% versus 0.2% consensus while personal spending printed flat versus 0.2% expected. We therefore think that next personal spending will increase significantly next month as the negative transitory factors fade away, putting the American people in a more positive mood. As a result, the dollar index rose 0.7% in New York before stabilising slightly lower in the Asian session. EUR/USD is moving sideways for the past 5 days between 1.10 and 1.0820. However the pair presents a positive bias and is getting closer to the resistance standing at 1.10 (psychological threshold and Fib 32.8% on April-May rally).

As expected, the Reserve Bank of Australia didn’t cut its cash rate and kept it unchanged at a record low of 2%; forward guidance was data dependent. The decision triggered a mini rally in AUD/USD as the RBA’s minutes from the May meeting showed that the Bank retained an easing bias. Nevertheless we still expect the RBA to cut rate further in the future. AUD/USD jumped 0.86% on the news to 0.7690, interrupting a debasement which lasts 3 weeks. On the downside, the closest support stands at 0.7553 (mid-April low) while a resistance can be found 0.7760 (previous high).

In UK, May’s Markit Manufacturing PMI figure shows that the business condition in the manufacturing sector didn’t improved as fast as expected with a read of 52 verse 52.5 consensus, while prior read was revised down by 0.1 to 51.8. The disappointing print dragged UK shares lower by -0.44% and triggered a small but quick GBP/USD sell-off. The cable now sits on the 1.5191 support (Fib 50% on April-May rally) and may break it to the downside if today’s UK economic data disappoint. EUR/GBP is taking advantage of the sterling’s weakness, despite mounting uncertainty about Greek talks. The euro gained almost 2% since May 27, stopping the recent debasement. EUR/GBP is trying for the second time to break the key resistance level at 0.7193 (Fib 61.38% on March-May rally).

In India, the Reserve Bank of India (RBI) cut its repo rate by 25bps to 7.25%, the third rate cut this year. As promised, Raghuram Rajan waited on banks to transmit previous rate cuts to the real economy (base rate at 9.85%y/y). USD/INR bounced higher to 63.86 before returning to 63.75. On the long-term, USD/INR remains in a positive trend, fuelled by successive rate cuts from the RBI, but is lacking strength to break the strong resistance standing at 63.90.

In Switzerland, May Manufacturing PMI surprised markets on the upside and came in at 49.4 versus 47.8 expected. EUR/CHF moved lower and slows the pace as it approaches the support standing at 1.03.