RBA keeps rates unchanged but sees more scope for cuts in a benign inflation environment


MAJOR HEADLINES – PREVIOUS SESSION

  • EU Jul Sentix Investor Confidence out at -31.3 vs. -25.0 expected and -27.0 prior

  • US Jun ISM Non-manufacturing out at 47.0 vs. 46.0 expected and 44.0 prior

  • NZ Q2 NZIER Business Opinion out at -25 vs. -65 prior

  • AU Jun AiG Performance of Construction Index out at 42.6 vs. 46.9 prior

  • AU RBA leaves rates unchanged at 3.0%


THEMES TO WATCH – UPCOMING SESSION

  • Swiss Budget Balance (0730)

  • EU ECB’s Ordonez speaks (0730)

  • NO Manufacturing Production (0800)

  • UK Industrial Production (0830)

  • GE Factory Orders (1000)

  • CA Building Permits (1230)

  • CA Ivey PMI (1400)

  • US ABC Consumer Confidence (2100)

Market Comments:

All change!

What started off as a risk aversion, buy the dollar and yen day finished the complete opposite as US equity markets clawed back early weakness to finish the day mixed, but mostly in positive territory. The catalyst for the reversal included a better-than-forecast ISM non-manufacturing number (47.0 vs. 46.0 expected) and comments from Moody’s that it was placing Brazil on review for a potential ratings upgrade (but note that Fitch downgraded California’s credit rating to BBB, 2 notches above junk after it was forced to pay some bills with IOUs). The attack on the 200-day MA on the S&P500 survived for another day with a pleasant rebound off 886.60 to finish at 898.72.

One surprising point from the breakdown of the ISM data was that the employment sub-index rose 4.4 points to 43.4, a surprise considering the dismal non-farm payroll number we witnessed last Thursday. Other sub-indices that produced improvements included business activity (+7.4 to 49.8), new orders (+4.2 to 48.6) and export orders up 7.5 points to 54.5 (the first reading above 50 since September) while production and new orders were stable and price-related indices mixed.

Positive developments in US bond markets also helped turn sentiment. The Fed bought another $7 bln of Treasuries today while the $8 bln TIPS auction was well received, paving the way for better sentiment going into the planned auction towards the end of this week.

As the preference towards risk aversion trades waned, so the USD gave back some of its gains, in some cases reverting back to the same levels where Asia had left them, notably in EUR and AUD. GBP was still on the soft side though, pressured by bad weekend press and poor sentiment. Despite the u-turn in appetite, note that the commodity sector remained weak. Oil prices were stuck at 6-week lows and gold hovered around the 925 mark.

Meanwhile, early dissection of the prepared draft G8 memo (thought the meeting hadn’t even started yet!) appears to focus on world trade/ anti-protectionism with the recent debate on the USD as a reserve currency, and its negative influence on the greenback, conspicuous by its absence.

The highlight of the Asian session was the RBA rate meeting with the headlines noting that the RBA left rates unchanged but the improving inflation environment leaving scope for further rate cuts down the line. However, additional comments indicated that the RBA viewed China as strengthening “considerably” and that economic conditions in Australia were not as weak as expected a few months earlier and the downside risks to the outlook have diminished. The RBA acknowledged that mortgage rates had seen a slight uptick of late, noting that they were still at “very low levels by historical standards”. AUD had a quick knee-jerk reaction lower (albeit 20 ticks) but held the lower 0.79 levels and could extend gains towards 0.80 unless the risk aversion story re-emerges as the session progresses.

CHF has received much focus in recent days following the SNB intervention on June 24. Any subsequent sharp CHF shift lower has been met with the usual rumour/talk of further central bank activity. However, crosses have shifted gradually lower and the EURCHF is sitting at the 61.8% Fibonacci retracement level of the 1.5010-1.5380 sharp up-move. Will this level trigger another response (at least verbal) from the SNB? Keep the ears open and eyes peeled……

The data slate continues to be relatively thin with only UK industrial production and German factory orders to tickle Europe. From North America there is nothing scheduled for the US while Canada releases building permits and Ivey PMI data. Looks like Wall St direction will again be the catalyst for FX moves today.